Former prime minister Manmohan Singh predicted a 2 percentage slump, Fitch group firm India Ratings & Research a 1 percentage point drop, and Asian Development Bank a fall of 0.6 percentage point — all lower than the government’s first advance estimate of gross domestic product (GDP) of 7.1% growth for 2016-17 over a year ago, which is exactly the same as the estimate of the Reserve Bank of India (RBI). But that’s not why the number put out by the Central Statistics Office (CSO), the government agency that arrives at the economic indicator, stands out.
A budget that will be presented for the first time on February 1, a month earlier than in previous years, may have got the goat of the Opposition parties, as this will be only three days before five states that constitute a fifth of the country’s population vote in assembly polls; the Election Commission has asked the Bharatiya Janta Partyled government at the Centre to respond to the Opposition’s claims that the budget could turn into a sop fest that influences the elections’ outcome.
One of the upshots of an early budget is that the advance GDP growth estimate, too, was brought forward by a month — in earlier years it was released on February 7 — which, in effect, means that the number has been arrived at, for the first time, with just nine months’ data. That period may be even smaller if you place the estimate of economic growth squarely against the backdrop of massive turbulence in the economy caused by the Centre’s move on November 8 to demonetise high-value currency notes of Rs 500 and Rs 1,000.
For the past two months, India has witnessed an unprecedented cash crunch, resulting in a decline in consumption of goods and services, re-calibration of hiring and compensation at India Inc, and distress selling of agricultural produce by farmers across states. It prodded Manmohan Singh, a former finance minister and RBI governor to boot, to contend that his estimate of a 2 percentage point decline may even be an “underestimate”. Singh aired his estimate in Parliament a fortnight after Prime Minister Narendra Modi announced the demonetisation policy, dubbed by the ruling party as a surgical strike against black money.
CSO points to robust numbers in sectors such as public administration, defence, financial services, real estate, professional services and the like, which ensured that the GDP growth stayed above 7% despite sectors such as mining and quarrying dragging it down. This first advance estimate number released on Friday is a three-year low — down from 7.2% and 7.6% in fiscal years 2015 and 2016, respectively. Still, India’s GDP growth number is above the psychologically significant 7% mark post-demonetisation — few countries in the world can boast such growth currently. This should give enough fodder for the ruling party to nullify any slowdown theory.
Does It Reflect the Reality?
Yet, how reflective is the estimate of current economic realities? The CSO has made it amply clear that its estimate is an extrapolation of the numbers mostly till October, which is why this GDP figure is not a reflection of the post-demonetisation period. And in case of some inputs such as deposits and credits where the immediate effects of demonetisation could have led to a distorted trend, the CSO took into account data only up to October.
So, can this 7.1% number be considered full-year GDP estimate? “The process of demonetisation is unfolding, and we can’t ascertain whether there is an impact or not and, even if there is one, we won’t know what will be the magnitude… Disentangling the change and the nature of change from the event is very hard to figure out. At this point, we have simply compiled, built, looked at the processes as they stand,” TCA Anant, chief statistician of India and secretary to the ministry of statistics and programme implementation, told ET Magazine earlier in the week when his team in New Delhi’s Sardar Patel Bhawan was still compiling the data. About 65 statisticians, including 20 officers of the Indian Statistical Service, compute India’s GDP number, among others.
Former Union finance secretary Arvind Mayaram questions the methodology for arriving at 7.1% for the full year without factoring in the disruption caused by demonetisation. “A GDP estimate based on the trend rate of growth (average sustainable rate of economic growth over a period of time) is valid in normal circumstances. But when there is a major disruption in the economy, such a projection based on trend growth becomes questionable,” says Mayaram. He finds the number dubious as 45% of GDP is contributed by the informal sector, which is largely dependent on cash and, therefore, hit hard by demonetisation.
For their part, the CSO statisticians had little choice but to release the number earlier this year on directions of the government, which in turn tied in with its plans for an early budget. In previous years, when the first advance estimate would be released on February 7, the CSO would factor in company data for the October-December quarter for most listed companies, apart from taking into account the Index of Industrial Production and other numbers at least till December. That would not have been possible this year, as the February 1 budget will have references to the latest available GDP number; both the budget and the pre-budget Economic Survey need some base estimates to frame projections and future policies.
Anant dismisses any suggestion of orders from the top. “Look, there is no political interference in our GDP calculation. I (as secretary in the ministry of statistics and programme implementation) approve the number before it is released,” he says emphatically. The short point, however, is that the budget numbers will be based on a GDP estimate that has not factored in the demonetisation effect. A clearer picture will emerge only after the CSO revises its estimate, first on February 28 and then on May 30. A downward revision may only be a matter of time — but not before the budget and five assembly elections