Gamble With Stats

Demonetisation

The GDP data minus note ban impact on informal sector lacks credibility

By Biswajit Choudhury, Meghna Mittal

The latest official data showing Indian Gross Domestic Product (GDP) growth at 7 percent for the third quarter was only marginally impacted by the November 8 demonetization measure has served to re-ignite the controversy about the methodology employed to calculate the country’s national income.

The Central Statistics Office (CSO) has estimated that India’s GDP for the third quarter ended December, at Rs 30.28 lakh crore, recorded a growth of 7 percent, compared with 7.3 percent in the previous quarter. The country had registered a GDP of Rs 28.31 lakh crore in the corresponding quarter of 2015-16.

The estimates of GDP growth for the full fiscal 2016-17, at 7.1 percent, marked a sharper fall from the 7.9 percent recorded for the fiscal 2015-16.

This appeared to fly in the face of previous private surveys documenting the disruption caused by the demonetization of Rs 500 and Rs 1,000 rupee notes constituting 86 percent of currency in November.

Both the Reserve Bank of India (RBI) and the International Monetary Fund (IMF) have lowered India’s growth estimates for the fiscal by up to 1 percent, citing the impact of demonetization.

“The methodology employed for GDP calculation, although workable during normal times, is absolutely not valid for unusual situations for the reason that it does not have data on the informal sector that has borne the brunt of demonetization,” economist Arun Kumar, formerly professor at Jawaharlal Nehru University (JNU) here, told.

The informal sector accounts for an estimated 45-50 percent of output in the Indian economy.

Kumar pointed to surveys done bodies like the PHD Chamber of Commerce, the All India Manufacturers Association, the Nikkei PMI and the State Bank of India (SBI) that highlight the impact of demonetization, whereby the unorganized sector growth has been hit to the extent of between “31 to 40 percent”.

“Instead, the situation for the organized sector can best be described as stagnant. In such a scenario, growth can never be positive…the figures should have shown zero percent or even negative growth,” Kumar said.

“Credit off take had started falling in October itself and worsened in November. The industrial rate of growth was negative in October and in December, with a slight pick-up in November. When businesses are not taking loans, where is the question of growth,” he added.

In this regard rating agency ICRA said in a note: “Since the early estimates of quarterly Gross Value Added (GVA) rely heavily on available data from the formal sector, which is expected to have weathered the note ban better than the informal sector, the Q3 FY2017 GVA growth of 6.6 percent may not be fully capturing the impact of the note ban.”

State-run SBI suggested that the steep downward revision in the GDP estimates for the third quarter of 2015-16 has, in turn, resulted in higher growth figures for the third quarter of 2016-17, thus masking the impact of demonetization in the Q3 figures.

“Even then it seems implausible that the positive effect of downward revision in previous year is strong enough to overpower the negative effect of demonetization in Q3 FY17. The numbers seems too good to be true,” SBI Group Chief Economic Adviser Soumya Kanti Ghosh said in a note.

Chief Statistician TCA Anant told reporters here after releasing the data that the impact of demonetization is difficult to assess in the absence of sufficient data.

“Policies such as demonetization are difficult to assess without a lot of data, a lot of which is still to come in. As of now we have factored in the third quarter figures on industrial production and only the advance filings of corporates,” Anant said.

In terms of GVA — considered a better measure of economic performance, as it excludes product taxes and subsidies — of Rs 28.02 lakh crore for the quarter in question, the growth at 6.6 percent was slower compared with 7 percent in the previous year.

What surprised economists further was that data for private consumption showed an increase of 10 percent during the quarter which felt the maximum impact of demonetization.

“There are widespread doubts about the accuracy of the national accounts numbers. The unexpected strength of today’s data will do nothing to allay these concerns,” Capital Economics said in a research note.

India’s GDP captures economic activity in the formal sector, which constitutes just 10 percent to 15 percent of the economy.

“The way estimates are obtained by extrapolation of indicators from the formal sector is an incorrect methodology in the scenario post-demonetization. Even zero percent growth is an optimistic scenario,” Kumar said.

Meanwhile, data also showed industrial growth in eight “core” infrastructure areas slowed down to 3.4 percent in January, compared to 5.6 percent growth in the same month last year.

Indirect tax revenues are being seen to have increased on the back of more transactions coming under the tax net, and higher fuel prices.

Anant told reporters that the nearly half percentage point difference between the GVA and the GDP growth figures is due to “an improved estimate in net indirect taxes”.

The country’s former Chief Statistician also said the latest GDP figures do not accurately reflect the negative fallout of the ban on high-value currency.

“My sense is that once the informal sector numbers come in next year, we would probably see that (growth rate) going below 6.5 percent,” former Chief Statistician Pronab Sen told a news channel.

According to Sen, the higher tax collections during November-December are explained by corporates paying excise on inventory they had sent out of factories and into retail outlets.

“There have been pre-payment of excise duty which is showing up in the difference between GDP and GVA growth,” Sen said.

The inventory offloaded by manufacturers, however, did not get picked up at retail outlets as demonetization pushed people to postpone purchases, as other private surveys have showed.

This is borne out by automobile sales data for the months of November and December, which record a fall.

The latest figures have reignited a two-year old controversy that began when GDP data was unveiled under a new series. The advance estimates of GDP for 2014-15, computed with the changed methodology, projected India’s growth during the year at 7.4 percent.

The new numbers seemed contradictory when compared with other economic indicators such as revenue growth of listed firms, expansion of bank, the index of industrial production numbers as well as real challenges confronting India Inc., such as weak demand, high debt and low earnings.