Q3 growth rate of 7%: Is it for real?

Statistics can be used to present different narratives. One needs to dig deep into data to get the real picture. The Central Statistics Office (CSO) data released on Tuesday showed that in the third quarter, the GDP grew at a baffling 7%. This would make it appear as if demonetisation had hardly affected the economy. Is that really possible?

One didn’t have to be an economist to note the pain caused by the November 8, 2016 decision to demonetise over 80% of currency notes in circulation, and its long-term impact. Anecdotal evidence shows huge job losses and businesses—especially in the small scale and informal sector—being morbidly affected. Even large industries such as automobiles showed a huge fall in sales in November and December.

Many major institutions had predicted that the GDP would take a huge beating due to demonetisation. In fact, State Bank of India (SBI) Research, for instance, had recently estimated the growth rate for the third quarter at 5.8%.

The CSO, though, retained its growth projection for 2016-17 at 7.1%. And, the third quarter (October-December) growth of 7% was only a slight fall from the second quarter (July-September) growth rate of 7.4%.

“There’s no surprise in it. I have been saying for sometime now that the GDP growth for the third quarter would be around 7%. The reason is simple. The corporates have not been affected much by demonetisation and it is that data that is prominently shown. The real impact of demonetisation has been on the informal sector,” says Pronab Sen, former Chief Statistician of India.

There’s more. The data may seem like it is based on actual variables—but, it isn’t.

“It is important to understand that the approach for compiling the data is the ‘advance estimates’ and the methodology is known as ‘benchmark-indicator method’,” says NR Bhanumurthy, senior economist at the National Institute of Public Finance and Policy (NIPFP). What this means is that the estimates are not on actual variables but by sector-wise estimates that are obtained by extrapolation of indicators.

Also, Sen says that there is no independent data on the expenditure side of the GDP. “It is estimated from the production data given out,” says Sen.

Bhanumurthy sees a couple of problems in the CSO’s latest data on both the consumption and expenditure side. For instance, the CSO numbers show the ‘private final consumption expenditure’ (PFCE) growing at 11.9% for this financial year when compared to 8.6% in the previous fiscal. Does this mean that while 86% of the cash was sucked out of the economy, and with a low digital transaction penetration, consumers have been spending freely and would continue to do so? That could be quite a stretch. “There is a front-loading of expenditure,” says Bhanumurthy.

Also, the government final consumption expenditure under the heading ‘public administration, defence and other services’ is also estimated to see a growth rate of 11.2%, from 6.9% last year. “This would be subject to sharp revision,” says Bhanumurthy.

And, these could substantially change the growth percentage levels which could be revised later to sub-7%. Meanwhile the perception would spread that demonetisation hasn’t affected the economy much.

“One will have to wait for the fourth quarter data,” says Sen. Bhanumurthy points out that the final numbers on the GDP will be out only around June or July.

“The real impact on the informal sector would be known only next year,” says Sen. That would be when the Labour Department puts forth its employment figures. A fairly accurate impact on job losses due to demonetisation would be known only by then. By when, perhaps, the NDA government can conjure up an entirely different narrative.