Upbeat business scenario owing to improved power supply

This piece is adapted from Macroeconomic Update, March 2017, Vol.5, No.1, Asian Development Bank, Nepal Resident Mission.

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The business community and the public are enthused by the government’s drive to end load-shedding. An inadequate supply of electricity is considered the most binding constraint to economic activities in Nepal. The existing efforts to end load-shedding through administrative and management overhaul is a welcome move. These positive measures should now also be channeled into reforming the overall energy market, including legislative and institutional reforms. 

The uninterrupted power supply has lowered cost of production for small and medium enterprises as they don’t have to invest in expensive alternatives such as diesel generators and inverters. Similarly, big firms are also generally pleased with limited hours of power cuts instead of unscheduled and longer hours of power cuts in the previous years. Most industries are now running at over 80% capacity compared to 50% capacity utilization in the previous years. Industrial outputs such as cement, iron and steel that are crucial for post-earthquake reconstruction are manufactured at record capital utilization rates. These efforts are having some positive effect on overall economic growth and inflation. Efforts to sustain the uninterrupted power supply would further boost economic activities in the coming years, lower pressures on prices of goods and services, and enhance the cost competitiveness of Nepalese goods and services.

As of the first week of March, the peak energy demand was estimated to be around 1253 MW. The total supply is about 857 MW, of which around 45% is imported from India. The load management efforts geared toward achieving allocative efficiency and efforts to plug in system losses are yielding positive results as evidenced in the last few months. For long-term solution, electricity generation has to increase to match the latent demand. Water and Energy Commission Secretariat (WECS) estimates that the total installed capacity requirement stood at 1721 MW in 2015 and is expected to be in excess of 3000 MW by 2020. By 2030, the installed capacity requirement to meet demand is projected to be over 10,000 MW. Construction of more medium and large-scale run-of-the-river and reservoir type projects need to be commissioned soon so that they are completed on time to catch up with the projected increase in electricity consumption, which at present is one of the lowest in the region.

Nepal Electricity Authority (NEA) has its priority already cut out in the medium-term to supply uninterrupted power. These include: (i) continue with efforts to achieve allocative efficiency; (ii) plugging leakages (estimated to be around 25%) arising from electricity theft and system losses; (iii) maintain and expand transmission and distribution lines for smooth distribution of power from surplus to deficit areas; (iv) increase generation by accelerating completion of ongoing projects and initiating new ones; (v) expedite signing of power purchase agreements with private sector developers; and (vi) continue efforts to overhaul administrative, financial and management functions. Currently, NEA leads the pack in terms of the highest net losses among the 37 public enterprises. Its losses in FY2015 was about 0.6% of GDP. The long-term need is to have separate entities for generation, distribution, transmission and trading of electricity. The strong support by the Ministry of Energy to the reforms measure initiated by the management of NEA is reviving hopes of a financial, functional and administrative turnaround of NEA.

Nepal: FY2017 Macroeconomic Update

Here is the executive summary and FY2017 growth and inflation outlook adapted from ADB Nepal's Macroeconomic Update, Vol.5, No.1.

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Macroeconomic Update

1. Despite suppressed services output because of the deceleration of remittance inflows, a bumper agricultural output, prospects of a pick-up in post-earthquake reconstruction in the last two quarters of FY2017 and an improving investment climate warrant an optimistic growth outlook than the previous update. The above average monsoon rains and the smooth availability of agricultural inputs, particularly chemical fertilizers, is likely to significantly boost agricultural output. Similarly, the notable improvement in power supply, the resumption of manufacturing activities following the lull after the earthquakes in 2015 and supplies disruption in 2016, and pick up in post-earthquake reconstruction works are expected to boost industrial output. The deceleration of remittance inflows and a marginal effect of the demonetization of higher denomination currency notes in India will likely suppress services activities from its potential level. However, services output is expected to be higher than in the last two years. Overall, tailwinds from the expected acceleration in post-earthquake reconstruction, a slight uptick in demand following the disbursement of housing grants and the election related expenditures may negate the headwinds from the demand dampening effect originating from deceleration of remittance inflows, demonetization shock in India and some degree of political instability in the Terai region. However, there still remains uncertainty over the intensity of these opposing forces. Hence, gross domestic product (GDP) growth (at basic prices) is forecast to grow between 5.2% and 6.2% in FY2017.

2. Although FY2017 budget was announced one-and-a-half month before the start of the fiscal year on the expectation it will provide enough time to plan for procurement and approvals, the expenditure performance till the first half of the fiscal year is not encouraging. The monthly expenditure pattern is similar to the ones seen in the previous years. Actual spending was just 26.2% of the planned spending by the first half of FY2017, the same as in the first half of FY2015 but lower than 30.2% in the same period in FY2014. Actual recurrent spending was 35.4% of planned recurrent budget, higher than 30.9% in the first half of FY2015. However, capital spending was just 11.3% of the planned capital budget, lower than 12.6% and 13.5% in FY2015 and FY2014, respectively. It is very likely that actual capital spending will heavily bunch in the last quarter of FY2017, indicating a persistently weak budget execution capacity of the government. The Ministry of Finance has outlined a series of measures to expedite capital spending.

3. The mid-year revenue mobilization stood at NRs277.6 billion, which is 49% of the total revenue (tax and non-tax) target for FY2017. It is about 69% higher than the revenue mobilized in the first half of FY2016. As a share of total targets, customs, value added tax (VAT), excise and income tax mobilization up to mid-year stood at 60.4%, 45.4%, 54.2% and 50.1%, respectively. Import-based revenues accounted for about 62% of total revenue in the review period. Overall, tax and non-tax revenue target for FY2017 looks achievable primarily because of the surge in imports following the supplies disruption last year. However, a downside risk to achieving the target is the slowdown in import of vehicles because of liquidity crunch in the last few months.

4. Inflation averaged 5.8% in the first half of FY2017, sharply down from 9.4% in the corresponding period in FY2016 and 9.9% in FY2016. The downward correction of prices following the highs during and after the crippling supplies disruption was expected as supplies gradually normalized (narrowing down the gap between demand for and supply of goods and services) along with the favorable monsoon (which boosted agricultural output), improved power supply (which is exerting downward pressure on cost of production) and substantial cooling off of prices in India. Food and non-food inflation averaged 4.2% and 7.1% in the first half of FY2017. Considering the normalization of supplies, rosier prospect for agricultural output, continued low fuel and commodity prices, subdued inflation in India, and lower than expected pace of post-earthquake reconstruction efforts so far, inflation in FY2017 is expected to undershoot the government’s target and hover between 6.0% and 6.5%. A deterioration of political situation is a major downside risk to the forecast.

5. Despite a significant increase in net domestic assets, a slowdown in net foreign assets of the banking sector led to a marginally lower growth of money supply (M2). M2 increased by NRs180.9 billion by mid-January 2017 (against the level in mid-July 2016), up from NRs169.8 billion compared to the corresponding period in FY2016. Net foreign assets grew by 4.7% (NRs45 billion), down sharply from a 18.7% growth rate (NRs139.7 billion) in mid-January 2016. The deceleration of remittance inflows contributed to the slowdown in building up of net foreign assets. The increase in M2 was reflected in the 5.1% growth of narrow money (M1) and 15.9% growth of time deposits.

6. The banks and financial institutions (BFIs) mobilized NRs144.4 billion (reaching a total of NRs2,161.2 billion) in deposits in the first six months of FY2017, higher than NRs100.9 billion mobilized in the corresponding period in FY2016. This translates into a growth of 7.2%, up from 6.0% in the first half of FY2016. Meanwhile, total credit (loans and advances) of BFIs increased by 11.0% (NRs208.5 billion) in the first half of FY2017, up from 4.3% growth in the corresponding period in FY2016 (NRs65.9 billion). The short-term interest rates remained higher than in the corresponding periods in FY2016, reflecting the liquidity crunch in the financial sector. The weighted average deposit rate of commercial banks was as low as 3.29% in mid-August 2016 and rose to 3.98% by mid-January 2017. Meanwhile, the weighted average lending rate was 8.88% in mid-August 2016 and rose to 9.31% by mid-January 2017.

7. The country’s external situation weakened as import growth outstripped export growth and remittance inflows decelerated. In the first half of FY2017, balance of payments surplus drastically decreased and current account balance was negative. The balance of payments surplus decreased to $419.6 million from $1.3 billion in the corresponding period in FY2016. The merchandise trade deficit widened to $3.9 billion, much larger than in the previous corresponding periods. This and deceleration of remittance inflows contributed to the current account deficit of $10.1 million, down from a surplus of $1.5 billion in the corresponding period in FY2016. The capital and financial accounts saw increases in net surpluses. Gross foreign exchange reserves increased from $9.7 billion in mid-July 2016 to $10.0 billion by mid-January 2017, sufficient to cover about 12.4 months of import of goods and non-factor services.

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FY2017 growth outlook

8. Despite suppressed services output because of the deceleration of remittance inflows, a bumper agricultural output, possibility of a pick-up in post-earthquake reconstruction in the last two quarters of FY2017 and an improving investment climate warrant an optimistic growth outlook than in the previous update. The above average monsoon rains and the smooth availability of agricultural inputs, particularly chemical fertilizers, is likely to significantly boost agricultural output.

9. Similarly, industrial output will be robust following a negative growth last year due to the four-and-a-half month long crippling supplies disruption. Specifically, the notable improvement in power supply and the resumption of manufacturing activities following a lull after the earthquakes in 2015 and the supplies disruption in 2016 will underpin a robust manufacturing sector growth. Meanwhile, the expected pick up in reconstruction of houses and settlements (in line with the latest acceleration in grant disbursement by National Reconstruction Authority [NRA]) will support growth in construction and mining and quarrying activities. Furthermore, addition of electricity from small hydropower projects this year will support growth of electricity, gas and water subsector. Increase in capital spending in the last quarter is also expected to boost construction, manufacturing and mining activities. 

10. The deceleration of remittance inflows and a marginal effect of the demonetization of higher denomination currency notes in India will likely suppress services activities from its potential level. The growth of migrant workers is expected to fall in FY2017 as well because of the slowdown in investment in the major overseas employment destinations (following the impact of low oil prices in the last several years), resulting in deceleration of remittance income. Consequently, wholesale and retail trade activities, the largest contributor to GDP growth after agriculture, are not going to be as robust as in FY2014 although the expected growth in FY2017 will be higher than in the last two years. The demonetization shock, which has already affected economic growth and inflation in India, has marginally affected remittance inflows from India, trading activities and investment in micro and small enterprises along the border areas. The marginal effects may linger until the normalization of the currency demand and supply in India. On the other hand, a surge in visitor arrivals, which had remained subdued in the last two years, will boost tourism activities. Additionally, the local elections, which are scheduled for 14 May 2017 related spending7 will boost consumption demand and will likely compensate for the dampening effect of deceleration of remittance and marginal effect of demonetization in India.

11. Overall, tailwinds from the expected acceleration in post-earthquake reconstruction, a slight uptick in demand following the disbursement of housing grants and the election related expenditures may negate the headwinds from the demand dampening effect originating from deceleration of remittance inflows, demonetization shock in India and some degree of political instability in the Terai region. However, there still remains uncertainty over the intensity of these opposing forces. Hence, GDP growth (at basic prices) is forecast to grow between 5.2% and 6.2% in FY2017. Specifically, the lower forecast is based on the assumption of a dented services sector growth and an agricultural output growth normally registered during times of favorable monsoon rain. The higher forecast is based on the assumptions of a stronger-than-expected agricultural output growth and less-than-expected deterioration of political situation as the local elections day approaches. A more definite forecast (i.e., a point estimate) will be available in Asian Development Outlook 2017, which takes into account the latest data and information available. Compared to the estimate in August 2016, the latest forecast revises upward the outlook for agricultural and industrial sectors.

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FY2017 inflation outlook

12. In addition to the normalization of supplies, a rosier prospect for agricultural output, continued low fuel and commodity prices, subdued inflation in India, and lower than expected pace of post-earthquake reconstruction efforts in the first half of FY2017, inflation is revised downward from the forecast in our previous update. A faster decline in prices of perishable and daily consumable goods as well as consumer durables largely accounted for the downward revision of inflation forecast for FY2017. Specifically, more than anticipated bumper agriculture harvest— thanks to the above average monsoon rains and the smooth availability of agricultural inputs, particularly chemical fertilizers— and faster than expected deceleration of consumer prices in India (partially contributed by the demand shortfall arising from demonetization shock in November 2016) played a critical role in such a forecast revision. Furthermore, the notable improvement in electricity supply this year has also decreased cost of production for business and household enterprises. That said, rise in international fuel prices and political disturbances—especially in the Terai region, as local elections, which are scheduled for May 14, approaches— may exert upward pressures on general prices of goods and services. The other likely sources of upward price pressures are direct and indirect election related expenses as political campaign intensifies and a demand boost arising from the expected acceleration in post-earthquake reconstruction works in the remaining period of this fiscal year. 

13. Considering these factors, headline inflation in FY2017 is expected to undershoot the government’s target and hover between 6.0% and 6.5% (Figure 15). A substantial moderation of prices of cereal grains, pulses and legumes, ghee and oil, spices and vegetables will exert downward pressures on overall food prices and contribute between 2.2 and 2.4 percentage points to the forecasted overall inflation. Similarly, non-food and services prices, which account for 56.1% weight in the CPI basket, are also expected to cool off on account of either stabilization or moderation of prices of consumer durables and utilities. It is expected to contribute between 3.8 and 4.1 percentage points to the overall estimated inflation. A deterioration of political situation is a major downside risk to the forecast. A more definite forecasted point estimate is available in Asian Development Outlook 2017, which takes into account the latest data and information available.

Rapid economic transformation in Nepal

It was published in The Kathmandu Post, 20 March 2017

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Rapid economic transformation

Implementing the vision would require consistent and committed political leadership, and a competent bureaucracy

Kenichi Yokoyama & Chandan Sapkota

Nepal has set a long-term vision to graduate from the Least Developed Country (LDC) category by 2022 and attain a prosperous, middle-income country status by 2030. The National Planning Commission is leading efforts to chart a bold and time-bound economic development roadmap to attain these goals. In this regard, the remarkable economic transformation of several Asian economies in a matter of a few decades provides important lessons for Nepal in its quest to achieve rapid, sustainable and inclusive economic growth. 

Economic structure

So far, Nepal’s economic transformation is not supported by growth-enhancing structural change. Economic structure and labour have shifted from low productivity agricultural to low productivity services, bypassing the industrial sector. In 1984, agricultural, service-based and industrial  sectors accounted for 61 percent, 26 percent and 13 percent of gross domestic product (GDP) respectively. Currently, while the agricultural sector accounts for 33 percent and the service sector a whopping 52 percent of GDP, industries account for just 15 percent of GDP. In effect, there is a gradual deindustrialisation since the industrial sector peaked at 23 percent of GDP in 1997.

Consequently, GDP growth has been low and volatile, depending mostly on the monsoon rains and remittance-fueled consumption demand in the service sector. Per capita GDP growth averaged just 2.6 percent in the last three decades, reaching $746 in 2016. Similarly, real annual GDP growth averaged 4.2 percent in the last three decades. GDP growth was above 8 percent in two instances only: in 1981 and 1984. In 1994, it grew by 7.9 percent. The economy has to grow by an average 8 percent each year to achieve its goal of becoming a middle-income country. 

Asian experience

The Asian experience—for instance the cases of Japan, Hong Kong, Singapore, Thailand, and Malaysia—provides valuable insight to initiate rapid structural transformation. 

These economies invested heavily in fundamentals and guided the economy with a clear vision, resulting in rapid and sustained economic growth. Initially, the structure of the economy was transformed by increasing the size and dynamism of the industrial sector. Agriculture played an important role by increasing labour and land productivity, stimulating growth in backward and forward linkages such as agro-processing, and releasing labour to help industrialisation. These were supported by stable fiscal and monetary policies that were occasionally unorthodox, and an investment-friendly policy regime. These strategies led to a sustained high growth rate. 

Furthermore, they invested heavily in infrastructure as a foundation for production and trading, prioritised human capital formation, fostered technology transfer, and strengthened institutions. This enhanced and sustained economic competitiveness and high per capita income levels. These measures were crucial in boosting productivity and value addition in the industrial sector, and in diversification and sophistication of productive services such as financial and IT systems. Here, well-planned and developed urban infrastructure was a critical catalyst.

In essence, pragmatic industrial promotion strategies along with access to markets, capital and technologies of more advanced economies helped these economics to rapidly take-off and boost per capita income. A clear and pragmatic development vision, incremental reforms to boost critical physical and social infrastructure, and strong institutional fundamentals and ownership underpinned this transformative process. 

Lessons for Nepal

The global investment, trade and financial regimes are different now compared to the times when these economies were taking-off and growing at high rates. As a latecomer, Nepal doesn’t have the same privileges, untapped potential and preferential market access opportunities. However, it does have significant opportunities to spur high growth by catering to the needs of the growing internal and favourable external markets through hydroelectricity, light manufacturing goods, high value agriculture products, tourism, and information technology development. Overall, raising productivity across all sectors will be the key. 

Note that enhancing per capita income to a middle-income level will be conditional on the correct positioning of micro and macro fundamentals. Faster catch-up is easier at this stage if productivity of agricultural and industrial sectors increases rapidly. In particular, a competitive manufacturing sector, which produces tradable goods, absorbs more labour, provides sustained sources of income and boosts entrepreneurship, is essential to move up the ladder of industrialisation. 

Nepal could point the macro fundamentals in the right direction by increasing the quantum and quality of investment in agriculture, transport, energy, urban development, education and skills, and healthcare. Nepal could also make progress by controlling inflation, improving governance and rolling out private sector friendly reforms. Some of these measures are an integral part of the government’s “second generation reforms”. However, the lack of effective implementation of policies and timely budget execution are subduing growth potential. Similarly, the micro fundamentals that need to be addressed are labour relations, land reforms, and anti-competitive practices, which are fostering inefficiencies and stifling growth opportunities in all sectors.

As the backbone of the economy, agriculture supports growth and livelihoods and lowers price volatility. Thus, enhancing land and labour productivity is crucial for a meaningful transformation. Productivity could be increased by using new technology and shifting traditional cropping practices to more high value added activities such as livestock, fruits, vegetables and agro-processing. It should be supported by transport networks, development of value chains, credit flows, irrigation and marketing.These call for well-structured programming and implementation of the Agriculture Development Strategy.  

Following the enhancement of agriculture, strengthening the industrial sector is vital for generating meaningful jobs and accelerating growth. Provisioning of infrastructure and supportive policy and institutional reforms are critical. Also necessary are pragmatic industrial promotion strategies, which could range from import replacement and export promotion that hinge on increasing domestic value added and employment, to establishing functional industrial zones and economic corridors. A range of industrial and trade policies/strategies are periodically updated and approved, but their effective implementation is not getting much attention.  

Nepal has a latecomer advantage in the light manufacturing sector, which normally absorbs semi-skilled labour force—similar to the workers who migrate overseas. Hence, it could get spill over demands from countries where wages are rising fast, provided that factors that supress competitiveness such as inadequate power supply, high cost of transport, and labour relations are addressed. Nepal could then gradually produce sophisticated goods that require higher knowledge, management skills and technology transfer. This would also complement high productivity services, ie moving from trading businesses to IT services, travel and tourism, and educational and healthcare services. 

Government’s role

The government has an important role to play in providing critical infrastructure, addressing market failures, designing a growth-enhancing tax regime, and implementing business-friendly policies to usher in a meaningful structural transformation. It also needs to enhance both the quantum and quality of public capital spending to over 8 percent of GDP annually. Given the sound fiscal space, though Nepal doesn’t have a shortage of funds until medium-term, a dearth of capacity to fully execute the budget and finish projects on time may prove problematic. 

Implementing the vision of a rapid economic transformation would require consistent and committed political leadership, and a competent bureaucracy. This would form the institutional fabric that helps translate good economics into good politics with economic development as the core theme. It ensures shared prosperity, makes reversibility of policies costly, enhances individual’s and firm’s confidence in the economy, and encourages the bureaucracy to provide faster and better service delivery.

With an appropriate mix of macroeconomic strategies, financial arrangements, smart project execution, and supportive institutions and policies, it is reasonable for Nepal to be upbeat about the possibility of a meaningful economic transformation and attainment of the long-term vision.

Yokoyama is Country Director of Asian Development Bank, Nepal resident mission; Sapkota is an economist. Views expressed in this article are personal

Nepal: Huge investment pledge and a new financial sector reform loan

Huge investment pledge during Nepal Investment Summit

Foreign and domestic investors pledged investment commitment (at this stage its "letter of intent" [LOI]) totaling NRs1,445.5 billion (around $13.5 billion) at the Nepal Investment Summit held on March 2-3 in Kathmandu.  The investors showed interest in hydropower, hotels, metro rail, airlines, tunnels, tourism, energy, agriculture, infrastructure, mines and financial sector.

• China: $8.3 billion (airport, highway, tunnel, water supply, hydropower, railways, road, smart grid)
• Bangladesh: $2.4 billion (food and construction)
• Japan: $1 billion (hydropower)
• UK: $1 billion (energy, agriculture, infrastructure)
• Sri Lanka: $500 million (hydropower, solar, wind)
• India: $317 million (investment bank, solar, steel plant, tourism, industrial and biomedical, )
• Nepal: $11.5 million (pulp and paper, construction, manufacturing, agriculture)

The last such investment summit was organized back in 1992. The investment summit had a broad support from across the political parties. 

The big question is: What is the government going to do (or what different is it going to do) to translate these commitments into actual investment? The government doesn’t have a plan yet. But, they are going to start working on it immediately by setting up sectoral committees to follow up on the pledged investment.  

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$100 million WB loan for financial sector reform

The World Bank is providing $100 million Development Policy Credit (the third in a series of program loans) to enhance financial sector development; restructure and consolidate the financial system; strengthen the legal and regulatory framework for crisis management, banking and insurance supervision and payment systems; and enhance the governance and transparency of the banking sector.

Here is a the latest Financial Sector Development Strategy (FY2017 - FY2021) approved by the government. 

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Investment summit & commitment in Nepal, strong Q3 growth in India

Investment worth NRs29.8 billion approved

Industrial Promotion Board (IBP) has approaved investment worth NRs26 billion (NRs20.5 billion as FDI) in cement, hotel and hydropower sectors. Most are for increasing paid-up capital.

• Arghakhachi Cement (NRs3 billion)
• Langtang Bhotekoshi Hydropower Company (NRs17.5 billion)
• Sarbottam Cement (NRs3.4 billion) 
• Sinohydro Sagarmatha (NRs3.4 billion) 
• Soaltee Crowne Plaza (NRs1.6 billion)
• Swetganga Hydropower and Construction (NRs320 million)

The IPB allowed Dolma Impact Fund (Mauritius) to purchase 320,000 units of shares of Swet Ganga Hydropower and Construction Pvt Ltd at a price of Rs 100 per unit (total NRs320 million).

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Nepal Investment Summit 2017

Investment Board Nepal (IBN) and Ministry of Industry (MOI) are organizing a two-day investment summit (March 2-3) to showcase and promote investment potential in Nepal, particularly in infrastructure, mining, tourism and agriculture. Nepal's Prime Minister Pushpa Kamal Dahal is set to inaugurate the summit, which will draw about 300 foreign delegates from around 25 countries. Indian Finance Minister Arun Jaitley and president of Asian Infrastructure Investment Bank (AIIB) Jin Liqun are also attending the summit. The last time such a summit was organized was in the early 1990s.

The government is promoting projects such as a chemical fertiliser plant, East-West railways, Kathmandu-Kulekhani-Hetauda tunnel highway, Second International Airport at Nijgadh, East-West electric Railway, Kathmandu Valley metro project, Kathmandu-Pokhara railway project, and Tamakoshi-3 hydropower project. Additionally, the government also intends to draw foreign investment in around 20 mines across the country that have deposits of limestone, copper, zinc and iron ore. Construction of SEZs at Simara, Panchkhal, Biratnagar, Kapilvastu, Jumla and Dhangadi will also be floated. 

Actual net FDI inflows in FY2016 was just $59.7 million. In recent years, it peaked to $113.9 million in FY2012. By the first half of FY2017, FDI commitment was NRs8.3 billion and actual inflows was NRs7.4 billion ($68.9 million). Investor confidence is gradually recovering, especially after the normalizatio of supplies, improved power supply, and approval of key legislation and policies (Industrial Enterprises Act, Special Economic Zones Act, Banks and Financial Institution Act, Intellectual Property Policy, Mining Policy). Amended versions of Foreign Investment and Technology Transfer Act and Labor Act are pending approval by the parliament.  

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High manufacturing aided Q3 GDP: FM Jaitley

According to the latest data released by the government, India's GDP growth slowed only marginally to 7% y-o-y in Q3, October-December (the time when the government withdrew high-value currency notes from circulation), from 7.4% in Q2 (July-September). In Q1, it grew by 7.1% (y-o-y). Private consumption, fixed investment and industrial output growth all accelerated in Q4, with only the services sector witnessing a slowdown. The second advance estimate of growth in FY2016/17 is 7.1%.

There is some controversy over the accuracy of the data (private consumption rose by 10.1% over the quarter; credit by banks fell to the lowest level in a decade but investment grew), but FM Jaitley argued that it was due to high manufacturing (8.3%). The index of manufacturing production decreased by 2% in December. Also, inflation fell as demonetization dampened demand.

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