October-December GDP at 7%: How to decode baffling but assuring growth despite demonetisation

India’s growth trajectory does not appear to have been affected, as was largely expected, too significantly by the demonetisation move according to the Central Statistics Organisation (CSO) which has put the growth in GDP in the third quarter at 7 percent. This is commendable considering that most forecasters were expecting a much lower growth rate in this quarter due to this phenomenon. This includes even international organisations such as the International Monetary Fund and World Bank which have spoken of lower growth on this score.

GDP numbers. Reuters

GDP numbers. Reuters

Simultaneously the growth rate for the year remains unchanged at 7.1 percent which was the same as was announced in the first advance estimate. Hence, any doubt that the reviewer may have had on the figures are dispelled with this announcement. It is lower than 7.9 percent which was registered last year and hence contrary to the expectation at the beginning of the year that growth could touch 7.5-8 percent we would be falling short by a little over 50 bps based on the final number.

The economy had been showing positive signs of a recovery before the currency demonetisation took place which affected sectors like housing, consumer goods and automobiles in particular. This does also come out in the corporate results for Q3 where growth in sales and net profit have been lower for these sectors even while the overall sample of companies has shown relatively stable growth. This is one reason as to why growth in manufacturing is high at 8.3 percent even while physical production as shown by the index of industrial production shows virtual stagnation. This is good news provided there are no downward revisions in the growth numbers – which was done for Q1 and Q2. Even so, the impact would be by 0.1-0.3 percent points that would not really damage the present picture.

The prime driver of this growth story has been the government which has been aggressive in spending and the effort that has been put on roads, railways and urban development should be commended as it has been able to counter if not reverse the interest of private players in investment, which has actually decline continuously in the last two years from 30.3 percent in FY15 to 26.9 percent in FY17. The government has to continue to propel the economy in this direction because it would take some time before industry would expand to justify higher investment. The banking system, on the other hand, has placed barriers in the way of infrastructure projects outside the government sector given the NPA and capital challenges. The question is really whether this will be enough for the economy to move to a higher growth path.

The sectors related to real estate have been negatively impacted as can be seen in the two segments — construction and real estate, finance etc. The latest data on core sector also shows that negative growth in cement prevails which can be attributed to the lower demand from the housing sector which would take time to recoup. On the services side, the real estate segment has pulled down the growth of the related category even while banking has been buoyant on account of the high flow of deposits into the system.

Should we revel in these numbers? While the picture is much better than expected the fundamental questions that have to be addressed remain. First, consumption needs to pick up to lead to better investment in future. Second, banks have to become stronger so that they are able to finance the growth process. Third, employment has to increase to ensure that growth is beyond just these numbers of 7.5 percent or 8 percent and more real or else we could be slipping into a jobless growth syndrome which has been the case so far. This is more important on the professional side when the US policies would be discriminating against immigrants that can affect our domestic software industry. Fourth, agriculture has done very well but the future is always uncertain considering that 65 percent of the land is dependent on irrigation. Fifth, the GST which is to be introduced this year could be a disruption as we are not sure if we are prepared for the same and could cause some reorientation. Therefore, there are several issues that have to be addressed in the next year.

While the presentation of these numbers is fair enough, the CSO would also need to go beyond and do two things. The first is to draw up a series for the years preceding 2011-12 as presently there is no way in which one can make a comparison with the past years. The second is that the physical growth numbers should be reconciled clearly with the GVA numbers and an explanation also given as to how the unorganised sector’s contribution is measured as presently there are several shoulder shrugs when trying to match these two sets of numbers. Presently the numbers just tell us that numbers are better than worse than an earlier benchmark period, which though useful can be enriched with an explanation.


Updated Date: Feb 28, 2017 20:49 PM

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