Growth Above 7% This Year, Says Government. Unlikely, Say Economists.
Advance GDP estimates by the CSO do not fully build in the possible impact of demonetisation on the economy
India’s economy is expected to grow by over 7 percent in fiscal year 2017, despite the hit to economic activity from demonetisation, if the government’s official estimates are anything to go by.
First advance estimates released by the Central Statistical Organisation (CSO) on Friday, suggest that gross domestic product (GDP) will grow by 7.1 percent in 2016-17 compared to 7.6 percent last year. On a gross valued added (GVA) basis, the economy is expected to grow by 7 percent compared to 7.2 percent last year.
The advance estimates have been released earlier than normal this year due to the Union Budget being advanced to February 1. As such, these estimates only build in officially reported data for the first two quarters of the fiscal year and early indicators of the third quarter. This means that the advance estimates may not incorporate the impact of demonetisation which was announced on November 8.
Briefing the press after the release of the estimates, TCA Anant, the country’s chief statistician, said that the first advance estimates were based on data available so far but added that certain indicators like bank deposits which had turned volatile after demonetisation were excluded. Anant added that none of the comments being made on the impact of the cash crunch on growth are based on facts.
Most of our indicators are based on real performance. So as and when there is an impact (of demonetisation) on real performance visible in the data, the estimates will be adjusted accordingly. We are not in a position to speculate and as a matter of habit we do not use untried methods to assess GDP growth.TCA Anant, Chief Statistician of India
According to the CSO’s estimates:
- GVA for the agriculture sector is expected to grow by 4.1 percent compared to 1.2 percent last year
- GVA for the manufacturing sector is expected to grow by 7.4 percent compared to 9.3 percent last year
- GVA for the mining sector is expected to contract by 1.8 percent compared to growth of 7.4 percent last year
- In the services sector, the financial services segment is expected to see growth of 9 percent compared to 10.3 percent last year
- The trade, hotels and transport segment is expected to see growth of 6 percent compared to 9 percent last year
On the expenditure side, the data showed that private final consumption expenditure is expected to rise by 6.5 percent at constant prices. A bulk of the support to the economy is coming from government spending, with government final consumption expenditure seen rising 23.7 percent at constant prices.
Investment remains the weak spot with a mild contraction being forecast in gross fixed capital formation during the year.
Economists BloombergQuint spoke with said that the first advance estimates don’t give a clear indication of the eventual rate of growth for the economy in the current fiscal, which most expect will be below 7 percent.
There are too many unanswered questions which this data doesn’t take into account. There will be a downside bias to the revised estimates. We see growth at about 6.8 percent in the current year.Anubhuti Sahay, Head of South Asia Economic Research, Standard Chartered Bank
Given the impact of demonetisation on actual activity from mid-November 2016 onward, projecting GDP growth for the full year by extrapolating the trends up to October 2016 for several sectors, may introduce more errors than in earlier years. This would be particularly apt for cash intensive sectors such as construction...Given the unfolding trends, we expect actual FY2017 growth to be lower than the Advance Estimates for sub-sectors such as manufacturing, agriculture, electricity and construction.Aditi Nayar, Principal Economist, ICRA Ltd
Even though an objective assessment of the demonetisation exercise on output growth is a difficult one given the mutual interactions, we expect GDP growth to be decisively lower than 6 percent in Q3FY17. In Q4FY17, it could only make a gradual comeback. Overall, our estimates for H2FY17 and FY17 GDP growth are at 6.3 percent and 6.7 percent respectively with a downward bias. The service sector growth rate is indeed having a significant downward bias.Soumya Kanti Ghosh, Chief Economic Adviser, State Bank of India
The Demonetisation Hit
The impact of the government’s decision to withdraw notes of Rs 500 and Rs 1,000, which left the economy grappling with a severe cash crunch, is far from clear. While some indicators have reflected weakness, others have held steady.
For instance, the Nikkei India Services Purchasing Managers’ Index (PMI) showed that the services sector contracted in November and December. The manufacturing PMI, too, showed a contraction in December.
In contrast, the index of eight core sector industries, which constitute 38 percent of the Index of Industrial Production (IIP), rose by 4.9 percent in November compared to 6.6 percent the previous month. In the agriculture sector, data shows that sowing during the rabi season was seven percent higher than last year, suggesting that farm output may not be badly hurt because of the note ban.
While the extent of damage to economic activity remains unclear, most economists have revised their estimates lower for the current and the next fiscal years.
On the back of the ongoing cash crunch, we expect GDP to grow 5 percent y-o-y in the October-December quarter and 6 percent y-o-y in the January-March quarter, about two percentage points lower than we had expected before demonetisation was announced. Thereafter, we expect growth to normalise gradually towards the 7 percent ballpark, but remain shy of the 7.5-8 percent range in FY18, due to adjustment costs that businesses and consumers face, in the process of formalisation and digitisation.Pranjul Bhandari, Chief India Economist, HSBC
Also Read: Here’s How Bad The GDP Number Could Get...
Impact On Budget Calculations
Concerns have also been raised regarding the reliability of the advance GDP estimates for making budget calculations. Earlier this week, opposition parties raised this concern as part of their attempt to get the union budget pushed back.
In a post on microblogging site Twitter, CPI (M) general secretary Sitaram Yechury said that the advance estimates would present a “wrong and misleading picture of India’s GDP growth rate which is bound to revised downward heavily later on.”
Economists, too, say that these number would need to be taken with a pinch of salt since economic conditions in the second half of this fiscal year may be materially different from the first half.
“There are too many assumptions. Too many extrapolations. Particularly this year, with demonetisation, you don’t know how the economy will respond,” said Madan Sabnavis, chief economist at CARE Ratings in a conversation with BloombergQuint earlier this week.