India’s gross domestic product (GDP) growth tumbled to 5.7% in the first quarterof fiscal 2018, slowest since the fourth quarter of fiscal 2013 (4.3%). Growthcould have been even slower, had ‘valuables’ not printed unusually high in thefirst quarter. Growth was on the slide even before demonetization happened;that only added fuel to the fire. Construction sector growth declined the most,given that it is heavily cash dependent.

Even as the economy was recovering from the demonetization shock, growthslowed further in the first quarter of fiscal 2018 in anticipation of the Goods andServices Tax (GST) rollout, leading to destocking of inventories and slowerproduction. Significantly, in the absence of an unusually high pace of growth invaluables (205%) in the first quarter, GDP growth could have been way moresluggish. The kick-up in valuables could be attributed to large gold purchasesahead of GST.

We believe the sharp decline in growth in the first quarter is transitory and theeconomy will grind up over the next few quarters as the impact of demonetizationand destocking wears off. But given the sharp slowdown in growth in the firstquarter, we estimate this fiscal’s growth to be 7%, or 40 basis points (bps) lowerthan our previous forecast. This forecast implies GDP growth of 7.4% on averagein the remaining three quarters. We believe investments will remain subdued asthe private sector continues to deleverage, and the government has limited fiscalspace and ability to quickly reverse the investment cycle. We foresee growth toessentially be consumption-led with following four drivers:

• Near-normal monsoon. The rains were 6% below normal till September 15.Although some geographies are deficient, they account for only 5% of kharifproduction. And since sowing has progressed well, we expect agriculture togrow at the trend rate of 3%.
  
• Softer interest rates and inflation. Demonetization created excess liquidityin the banking system. This has facilitated swifter transmission in lendingrates, which were a tad rigid in the past. In fact, rates across instrumentshave been easing.
  
• Implementation of Seventh Pay Commission recommendations by stateswill support purchasing power. Although the Seventh Pay Commission lacksthe muscle of sixth, its implementation this year will provide mild support togrowth.
  
• Some bounce back in pent-up demand, which was postponed due to thedemonetization