Will Statistical Changes Lift GDP Growth In The Fourth Quarter?
A gantry crane loads shipping containers onto a truck at the Kirshnapatnam Co. port in Kirshnapatnam, Andhra Pradesh, India (Photographer: Prashanth Vishwanathan/Bloomberg)  

Will Statistical Changes Lift GDP Growth In The Fourth Quarter?

The government’s Central Statistical Office (CSO) will release its estimate for growth in the fourth quarter of fiscal 2017 on Wednesday. Apart from telling us whether there was any spillover impact from demonetisation in the January-March period, the CSO’s release will also tell us whether changes in the way the Wholesale Price Index (WPI) and the Index of Industrial Production (IIP) are calculated have altered the view on India’s growth trajectory.

Bloomberg consensus estimates peg fourth quarter gross domestic product (GDP) growth at 7.1 percent and gross value added (GVA) growth at 6.8 percent. Growth numbers may be stronger on account of the new WPI and IIP series, both of which will have a bearing on GDP and GVA growth. The CSO is also likely to release a revised series of data for the last few years, after adjusting for the changes made to the wholesale inflation and industrial output data series.

Expect Growth To Be Higher

Most economists expect growth, both in GDP and GVA terms, to be higher once the new WPI and IIP data are accounted for. This is because the revised data shows lower wholesale inflation and higher industrial output. GDP and GVA are two separate methods of measuring growth in the economy. Most economists tend to see GVA growth as a better indicator as it excludes the impact of indirect taxes and subsidies.

Saugata Bhattacharya, chief economist at Axis Bank, sees GVA growth for the fourth quarter at 7.4 percent compared to 6.6 percent during the December-ended quarter. This estimate builds in the impact of the revised WPI and IIP series.

Since the indicator is measured in nominal terms and is then deflated using WPI, the real growth is expected to be higher in the new series compared to the old series, explained Bhattacharya.

Will Statistical Changes Lift GDP Growth In The Fourth Quarter?

Just as the WPI will push up GVA growth, so will the revised IIP series.

Quasi corporate and un-organised sector growth is measured using IIP Manufacturing. New IIP series puts manufacturing growth at 4.9 percent compared to -0.5 percent assumed in advance estimate (as per old series). As such, the updated data series is likely to push growth up.
Saugata Bhattacharya, Chief Economist, Axis Bank

A stronger fourth quarter will also push up growth for the full year.

Kotak Economic Research expects GVA growth for fiscal 2017 to be revised higher by 50 basis points to 7.2 percent compared to the CSO’s earlier estimate of 6.7 percent.

“Preliminary GVA will be impacted the most as it takes inputs from IIP for its computation (largely for unorganised sector). Removing indirect tax component from the WPI will also improve real GVA estimation and reduce the faulty deflator problem to some extent,” said economists Madhavi Arora and Upasna Bhardwaj in a report on Monday.

Kotak also expects GVA growth for fiscal 2016 to be revised higher by 40 basis points to 7.8 percent.

A Re-Look At The Past?

Soumya Kanti Ghosh, chief economist at State Bank of India, expects significant upward revision to past data as well. The steepest revision may be seen for fiscal 2014, where GDP growth data may be revised higher by almost 80 basis points (bps), Ghosh estimates. For fiscal 2017, GDP growth is likely to be bumped up to 7.6 percent compared to 7.1 percent earlier, Ghosh wrote in a report released earlier this week.

We expect 7.2 percent GDP (GVA: 6.8 percent) growth for Q4 FY17 and also upward revision in all the preceding three quarters. The Q1, Q2 and Q3 GDP numbers are expected to be revised by 40 bps, 60 bps and 40 bps, respectively to 7.6 percent, 8.0 percent and 7.4 percent.  
Soumya Kanti Ghosh, Chief Economist, State Bank of India
Will Statistical Changes Lift GDP Growth In The Fourth Quarter?

The Demonetisation Impact

The data to be released on Wednesday will also add more information to the analysis around the impact of demonetisation. The revised IIP data had suggested that demonetisation had a deeper impact on the economy than assumed under the previous data series. The revised GDP data for the third quarter and also for the fourth quarter will provide a clearer picture of how deep and how long lasting the impact proved to be.

Benefiting from the gradual remonetisation, GVA growth is likely to improve to 6.9 percent in Q4 FY2017 from the initial estimate of 6.6 percent for Q3 FY2017, while remaining weaker than the robust 8.1 percent in Q4 FY2016. Our forecast of a 6.9 percent GVA expansion in Q4 FY2017 builds in a healthy 8.8 percent year-on-year growth in services, and moderate rise of 5.4 percent and 4.0 percent, respectively, in industry and agriculture, forestry and fishing.
Aditi Nayar, Principal Economist, ICRA Ltd.
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