Q3 GDP Numbers at 7 % Shows Economy is Resilient

K R Sudhaman

Demonetisation has not hit the economy badly as feared and India remained fastest growing economy, a tad higher than China if one goes by the Central Statistical Organisation’s latest figures. This year’s third quarter figures released recently estimate Q3 GDP at 7 per cent. The risk of demonetization has impacted growth significantly because of good monsoon, perhaps and the resilience of the economy.

The CSO also stuck with its January advance estimates for the full year 2016-17 at 7.1 per cent. The seven per cent growth in Q3 is marginally lower than 7.3 per cent recorded in previous quarter Q2, which meant that GDP has marginally slowed down. The demonetization happened on November 8, 2016 that is, during third quarter when Rs 500 and Rs 1000 notes accounted for 86 per cent of the currency in circulation was withdrawn.

No one is disputing the fact that demonetization has hit the economy in the short-term as 50 per cent of the Indian economy dependent on informal sector, which largely dependent on cash economy. A large chunk of informal sector is dependent on agriculture, which has done very well during the period, because of good monsoon, after two years of drought. This minimized the impact of demonetization on the informal sector as sowing increased considerably giving boost to the economy. The farm sector is expected grow at over 6 per cent, which is much more than the average 4 per cent, thanks to copious rains this year. Of course, the exact impact of demonetization in the informal sector will be captured only when rabi output will be known after the harvest takes place in April. Nevertheless the Q3 figures have proved the doomsayers wrong and some economists forecast that the slowdown to the economy could be as much as two percentage points to GDP.

It is wrong to say that the CSO data are fudged as this national statistical organization is respected World over and their figures formed the basis for all data calculations. Of course it may be true that some data are not fully captured, due to large informal sector in the country and lag effect in collection of data, but it did not mean that the CSO figures are not representative of the growth trend, which is positive and upward. The better than expected performance in the third quarter is not only due to the farm sector but also mining and manufacturing. Also the government expenditure during the period increased and all these indicated that there is revival and the economy is on road to recovery. The sharp increase in agriculture growth at 6 per cent in third quarter as compared to 3.8 per cent in the previous quarter and a contraction 2.2 per cent in the previous year is something noteworthy. It also would have the multiplier effect on the economy as good agriculture will push up consumption demand thereby encouraging more sale of consumption goods particularly two-wheelers, cars and white goods. This will also encourage fresh capital investments.

All these augured well for the economy. It is only the financial, real estate and professional services segment that lagged and these sectors are also expected to pick up in the coming months after a temporary setback due to demonetization with improved economic activity.

Finance Minister Arun Jaitley is right in saying that the CSO data belies the exaggerated claims made by many that the rural and farm sectors were in distress due to demonetization. All those economists who predicted sharp fall in India’s GDP growth in Q3 after Government invalidated high-value currency notes on November 8, have been proved wrong. However, many commercial banks, including State Bank of India and brokerages say that Q3 growth number was unnaturally high and could be revised down. This is partly because of large increase of cash in the books of several companies. State  Bank of India said there had been sharp downward revision of GDP numbers for the third quarter of the last financial year, resulting in higher growth in the third quarter of 2016-17 and masking the impact of demonetization. Even then it seems implausible that the positive effect of downward revision is previous year of strong enough to overpower the negative effect of demonetization in Q3.

Edelweiss securities said that what was particularly striking in the GDP data was sharp pick-up in the manufacturing sector and steep acceleration in real private consumption.

There are may have been some hiccups in the short-term due to demonetization but in the long-term, it is likely to have significant increase in flow of financial savings, greater formalization of the economy, greater digitisation and transparency. The surplus liquidity in the banking system will spur growth due to increased access to credit. With increased availability of cash now, the growth will get a further boost with informal sector picking up substantially. Also the price stability brought about with moderating inflation will also act as a catalyst to growth, particularly rural consumption jumping up after two years of low consumption due to drought.

There also already indications that companies and consumers have overcome the problem of cash crunch in previous months. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose to 50.7 in February from 50.4 in January, suggesting further improvement in manufacturing sentiment. A PMI reading of over 50 indicates expansion.

Also domestic passenger vehicles sales rose 9.5 per cent in February from the year ago, marking second successive month of recovery after 14.4 per cent rise in January.

For the full year, the economy is expected to clock 7.1 per cent GDP growth. This is certainly slower than 7.9 per cent growth in 2015-16, but it is much better than near 6.5 per cent growth projected for 2016-17 earlier. CARE Ratings has raised its GDP growth to 7.1-7.2 per cent for 2016-17 from 6.5 per cent forecast earlier. ICRA predicts India now growing at 7.1 per cent from its earlier projections of 6.8 per cent.

The cash-intensive informal sector had certainly been affected due to demonetization and there is a possibility that CSO data could revise this advance estimates when the final figures arrive in May. But none can deny the fact the impact had been minimal and that now the cash crunch is over, the economy is certainly on road to recovery with good agriculture growth of over 4 per cent this year and manufacturing, trade, domestic consumption, particularly rural and construction sectors picking up in the coming months. India is certainly on a sweet spot and only major and emerging economy growing reasonably well and not slowing down appreciably, unlike China.

With global economy too showing signs of recovery, India’s growth will only be pushed up further in 2017-18 to get back rapidly to high growth path of 8-9 per cent. With inflation moderating and furthering fiscal consolidation, India is in for a sustained high growth path, that too with the implementation of far-reaching tax reform, Goods and Services Tax. Rollout of GST alone will push India’s GDP by 1-2 percentage points. The doomsayers are bound to be proved wrong.

(K. R Sudhaman, has over 40 years of experience in Journalism, was formerly Editor in Press Trust of India and Economics Editor in TickerNews and Financial Chronicle)

(View expressed are personal)