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Should we be happy with 7.2% GDP growth?

By Vikas

The government is going hammer and tongs over the 7.2 percent gross domestic product (GDP) growth during the October-December quarter of fiscal 2017-18. The government is trying to project that Indian economy is on a path of revival after the setback due to demonetisation and poorly implemented GST.

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Considering that GDP had fallen to a three-year low to 5.7 per cent in the April-June quarter and that the growth in July-September quarter was 6.5 per cent, 7.2 percent growth looks better. Could it have been higher or is it something to really cheer about? Well, it all depends on various factors and the perspective with which one looks into it.

During the December quarter, the gross valued added (GVA) for manufacturing grew at 8.9 per cent, higher than 6.9 per cent in the previous quarter. Similarly, the farm sector GVA grew at 4.1 per cent compared to 2.7 per cent in the previous quarter. The construction sector recorded a growth of 6.8 per cent, higher than 2.8 per cent in previous quarter. The services segment including financial services grew at the rate of 6.7 per cent up from 6.4 per cent in previous quarter.

All these numbers look fine but must consider that the slowdown India endured was largely self-inflicted. A bad-debt crisis, an inexplicable decision to ban cash holdings overnight and then a poorly planned rollout of a new goods-and-services tax combined to push Indian growth well below six percent, said a Business Standard report.

Several experts opine that the growth rate could have been close to double-digit had the GST been properly rolled out or if the government had been prudent about the demonetisation decision. It all again boils down to what really was achieved by the sudden note ban which was aimed at curbing the black money menace.

According to data released by the RBI, the total value of invalidated Rs 500 and Rs 1,000 notes at the time of demonetisation was Rs 15.44 lakh crore. As on 30 June 2017, around Rs 15.28 trillion returned to the RBI post demonetisation. This means 99 percent of the demonetised currency has found its way back to the banking system. Only a little over Rs 16,000 crore of Rs 15.44 lakh crore was not returned.

This means that there really has not been much of an impact on black money hoarders due to government's move. In fact, the theory of black money stashed in cash outside the formal system seems to have fallen flat. So, note ban did more harm to the economy than good. Businesses suffered and the economic growth was hit by a significant margin.

So, while cheering about 7.2 percent GDP growth, we must keep in mind that it could have been much higher.

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