Discounting note ban GDP seen 7.1% in FY18; can govt base budget on these numbers?


The first question that comes to mind on the advanced estimates of growth for 2016-17 released on January 6 is – are these going to be the assumptions on which the Union budget for 2017-18 will be based; figures which do not factor in one of the most disruptive developments in the economy?

Let’s get the bare facts out of the way first. The advanced estimates released by the Central Statistical Office (CSO) pegged gross domestic product (GDP) growth in this fiscal at 7.1 percent. That’s what the Reserve Bank of India (RBI) had also reckoned in its last monetary policy less than a month back. Growth in 2015-16 was 7.6 percent.

Arun Jaitley

Arun Jaitley

Agriculture (4.1 percent) and public administration, defence and other services (12.8 percent) are the only two sectors set to grow at a faster pace than in 2015-16; all other sectors show lower growth. Mining and quarrying is expected to see a fall in output of -1.8 per cent.

Private consumption, which had been shoring up growth, is expected to fall; growth will slow to 6.5 percent from 7.4 percent. As percentage of GDP, its share will drop from 59.5 percent to 59.1 percent. Investment demand, sorely needed for sustained growth, will continue to remain elusive – growth is estimated to see a significant decline; from 3.9 percent to -0.2 percent. Its share in GDP too may drop to 26.6 percent from 29.3 percent. Government consumption expenditure alone is expected to more than grow – the data projects a surge of 23.8 percent from 2.2 percent.

Budget numbers are always based on the advanced estimates of the current fiscal. Normally they used to be released on February 7 and by that time, the first revised estimates of the previous fiscal (2015-16 in this case) would also be in (they are released on the last day of January).

According to a former Chief Statistician and former chairman of the National Statistical Commission, the advanced estimates then used to be based on two months data from the index of industrial production and on wholesale price inflation (WPI), the first advance estimates of rabi production and data on January harvest from the south (mainly rice) and some of the third quarter filings of the corporate sector.

The early release this year (warranted because the date of the budget has been advanced) means much of this information will not be available now. Nor will the first revised estimates of 2015-16 be available.

This may not have been a problem in a normal year, Sen points out, because projections based on standard seasonality could have been worked out. Yes, the figures would have been less accurate than when the estimates were released in February, but they would not have been way off.

That will not be the case now. The current chief statistician T. C. A. Anant has admitted that detailed information for most indicators is available only till October (

Chief economic adviser Arvind Subramaniam is going to have his task cut out, working on numbers for just the first seven months of the fiscal. Economic affairs secretary has said that the CSO, being a statistical organisation, cannot go by anecdotal evidence but has to rely on statistics. But can budget numbers be worked out on anecdotal evidence? How accurate will the assumptions be? Assuming the 7.1 per cent growth figure is fairly accurate, this is based on the provisional figure of GDP in 2015-16 released in May 2016. That year’s revised estimates will be out on January 31, a day before the budget. Any change in the GDP figure will skew the budget numbers.

There is also the issue of whether growth will touch even 7 per cent; the consensus among economists in rating agencies and companies is that it will not move beyond the 6.7-6.9 per cent range, with a downward bias. Remember that the economy was slowing even before demonetisation. GDP growth in the first half (H1) of this fiscal (April-September) was 7.2 per cent against 7.5 per cent in H1 of 2015-16. The economy needed to accelerate hugely in the next two quarters but has gone into a slump. Most estimates put growth in the third and fourth quarters at below 6.5 per cent.

Which could be the problem areas? Manufacturing certainly, with the consumer goods sector taking the biggest hit, as the cash crunch is now expected to last till well into March. A State Bank of India (SBI) Ecowrap report expects a double digit decline in sales in this sector. The automobile sector is cited as one that will take a bad hit, but that seems unlikely since the number of cash transactions here are not huge. The SBI report also projects a sharp slowdown in the construction, real estate and cement sectors. A Crisil report points to the latest manufacturing Purchasing Managers’ Index (PMI) data that hints at manufacturing activity contracting for the first time in this fiscal in December; services activity registered a decline for the second consecutive month in December.

The CSO estimates projected a handsome growth in agriculture this fiscal, but much of this is based on rabi sowing; estimates on harvest may well be different. The CSO estimates are for agriculture, forestry and fishing. Aditi Nayar, principal economist ICRA, points to the likelihood of non-crop agricultural sectors, especially horticulture and livestock being adversely impacted by the liquidity crunch.

Another set of advance estimates are due on February 28, along with Q3 data. That may present a more realistic picture. But the budget would be close to a month old by then. The numbers in this budget will certainly be interesting to watch.