Much surprise, and some disbelief have greeted the Central Statistical Organisation’s second advance estimation of 7.1 per cent growth for the 2016-17 fiscal along with the first growth estimate for the Q3 (Oct-Dec) being put at 7 per cent, only slightly less than the 7.4 per cent estimated for the July-September quarter, signaling the government’s major strike on parallel economy through demonetisation had little or no impact.
This seems surprising considering that 86 per cent of the currency was impacted in the demonetisation of Rs. 500 and Rs. 1,000 currencies.
Contrary to reports of demonetisation having negatively impacted private consumption, government data shows a higher consumption in the third quarter despite the demonetization move on November 8. One could of course explain part of this by taking into account that Dusshera and Diwali, which account for a large chunk of expenditure on jewellery and FMCG sales in the country, came before demonetisation. Of course the window to exchange or use illegal currency saw frenzied buying by many with unaccounted money but was it enough to push up private consumption expenditure? Only further revision in data will bring forth the real picture, state experts.
“We expect some revision but not major, as everybody is operating on anecdotal evidence. Nobody has the full picture,” states D.K Joshi, chief economist, CRISIL rating agency.
Stressing that the demonetisation impact has proved to be transitory and is not expected to last long as many feared, Joshi however points out that “there is some downside to the estimates because the informal sector is probably not appropriately captured in the first estimate of Q3. The impact on that sector (a big chunk of the economy) will probably be better captured in the next estimate.” The CRISIL is maintaining its growth projection of 6.9 per cent for 2016-17 fiscal.
The next release of quarterly GDP estimates for the quarter January-March, 2017 (Q4 of 2016-17) and provisional annual estimates for the year 2016-17 is scheduled for May 31.
In the CSO data released on Tuesday, the growth for Q2 has been revised upwards by 0.1 percentage points. Earlier, in the revised advance estimate for 2015-16 fiscal, growth was raised from 7.6 per cent to 7.9 per cent following higher growth estimates for industrial and services sectors.
N.R. Bhanumurthy, Professor at the National Institute of Public Finance and Policy, states that the CSO projections have raised two queries. Firstly, whether the quarterly GDP estimates methodology is consistent with the annual GDP methodology used by the government statistical body? Secondly, how many components of demand side and value addition are based on simple projections and how much on actual information?
“In pushing ahead of advance estimates by one month to accommodate the advancement of budget presentation in parliament, the CSO would not have had such robust information regarding the underlying macro-economic strength….It could lead to huge structural errors. But, on face value, the 7.1 per cent GDP growth for the full year and 7 per cent for Q3 is a pleasant surprise,” states Bhanumurthy.
The CSO data shows that in Q3, agriculture, forestry and fishing grew 6 per cent as against 3.8 per cent in Q2, while mining and quarrying activity grew 7.5 per cent in Q3 up from -1.3 per cent in Q2. Also government-supported expenditure in the form of public administration, defence and other services rose 11.9 per cent as against 11 per cent in the previous quarter.
The only sectors showing slower growth in the third quarter compared to the preceding one were construction (2.7 per cent in Q3, 3.2 per cent in Q2), and financial, real estate and professional services, (3.1 per cent in Q3; 7.6 per cent in Q2).
Prof Shashank Bhide, Director, Madras Institute of Development Studies, says it is interesting that the advance numbers don’t look as bad as expected. “We need to look at the Q4 numbers also to get the full understanding on the demonetisation impact,” says Bhide, pointing out that the higher growth projections for agriculture for the whole year from 4.1 per cent to 4.6 per cent as also higher government spending – in public administration and defence – could be attributed for the higher than expected projection. The final government consumption expenditure grew by a staggering 19.9 per cent in Q3, according to CSO data.
Majority of growth projections in the wake of demonetization had expected impact on the Q3 and Q4 growth. Bhide points out that the output numbers are however surprisingly good but he remains not too sure on private consumption front. Which is why, like many other economists, Bhide would rather wait for better coverage of Q4 data before passing a verdict on demonetization and its impact. The CSO data may have cheered the NDA government and policy makers, but whether the general public also shares the same sentiments the political verdict from five states on March 11, even as the next advance estimates on May 31 will reveal a better picture. The wait for the final picture will have to be longer.