CSO needs to take a second look at manufacturing and mining

The Central Statistics Office (CSO) on Tuesday released data that the economic growth in the third quarter (October-December) 2016 stood at 7% despite the demonetisation exercise and that the overall GDP growth projection for the entire financial year would be 7.1 %.

Many national and international economic organisations, experts and think tanks had cut the Indian growth forecasts by varying degrees since the demonetisation exercise in November.

The Reserve Bank of India (RBI) had pegged India’s growth at 6.9% for financial year of 2016-2017. The National Council of Applied Economic Research (NCAER) cut the number to 6.9% against an earlier projection of 7.6%. The Asian Development Bank (ADB) had pegged the number at 7% and most recently; the International Monetary Fund (IMF) had cut the growth figure down to 6.6%—significantly lower than its initial estimate of 7.6%. Rating agency Moody’s had revised the growth figures to 7.1% from their earlier estimate of 7.5%.

The CSO numbers are closer to the pegged down forecasts of the various economic experts and analysts. The overall projected GDP growth of 7.1% for the financial year also comes down from the previous year’s GDP growth of 7.9% even though India retains the title of the world’s fastest growing economy, staying ahead of China’s 6.8%.

The initial look into the 7% growth numbers in the third quarter does indeed give an impression that the note ban had minimal effects in the economy. In-depth analysis of the various individual sectors however does raise some very intriguing observations. The note ban exercise and the resultant cash crunch did affect some sectors badly.

The construction industry had a growth rate of 2.7%, down from the previous quarter figure of 3.4%. The financial services sector has taken the biggest hit, down to 3.1% from a 7.6% growth in the second quarter of the financial year. The growth of 6% in the Agriculture sector from the previous quarters 3.8% owing to the good monsoons was expected.

Increased Government spending up to 19.9% from the previous quarter’s 15.2% did offset some of the decline in other sectors.

The manufacturing sector growth number from 6.9% in the second quarter to 8.3% in the third quarter have raised some eyebrows.

• According to Index of Industrial Production (IIP) data, the manufacturing sector growth contracted in October by 2.4%, grew by 5.5% in November and again contracted by 2% in December. If one looks at the year-on-year cumulative numbers, there has been actually a negative growth in all these three months.
• The RBI’s bank credit data also contradicts the CSO findings. According to the RBI, the bank credit to the industry contracted by 4.5% in December, 2016 when compared to an increase of 4.9% in December, 2015.
• According to a study by the All India Manufacturers’ Organization (AIMO), the country’s largest organisation of manufactures, the first month since demonetisation saw the micro-small scale industries suffering 35% job losses and a 50% dip in revenue. AIMO, which claims representation of 3 lakh companies also predicts a drop in employment of 60% and loss in revenue of 55% before March 2017.

The mining and quarrying sector shows a tremendous boost of 7.5% from the previous quarter’s negative growth of 1.3%. Again a careful look into the projections of this sector raises more questions than answers.

Mining and Quarrying

Q2FY16 13.9%

Q3FY16 13.3%

Q4FY16 8.6%

Q1FY17 -0.3%

Q2FY17 -1.3%

Q3FY17 7.5%

How did an industry growing at steady double digits between the first and third quarters of the last financial year suddenly have such a drastic decline in the next three quarters before a rapid increase in the third quarter of this financial year? These figures insinuate the rearrangement of the quarter-to-quarter growth numbers to show exaggerated figures in the demonetisation affected third quarter.

A closer look into the CSO data does show that the overall GDP growth forecast for the financial year 2016-2017 has come down to 7.1% from the initially expected figures of around 7.6%. No small affair considering that every 1% of the GDP fall corresponds to a figure of ₹1.5 lakh crores.

A closer peak into the much discussed and optimistic third quarter data shows an earnest and hard attempt by the CSO to back the Government’s claim that complete remonetisation has already taken place juxtaposed against the evidence and expert analysis put forward by organisations ranging from the IMF and the ADB to the RBI and NCAER to Moody’s.

Anil K Antony is a Technology & Social Entrepreneur, Venture Architect with experience of high technology projects in the Silicon Valley and India. He tweets at @anilkantony