December quarter GDP numbers are a hard act to follow

In one of his addresses, Prime Minister Narendra Modi spoke on the timing of demonetisation, saying that you treat a patient when he is healthy and not when he is weak. His assessment of the economy being healthy at the time of demonetisation seems to be correct if the latest GDP numbers are to be believed.

Economists surveyed by CNBC-TV18 before the GDP data was declared were expecting the economy to grow by 6.1 percent. The data print surprised with a 7-percent GDP growth. The government was quick to claim that demonetisation had little impact on the economy.

Analysts, however, were not amused. Edelweiss in its report raises the issue ‘What is particularly striking in today’s data is the sharp pick up in manufacturing sector and steep acceleration seen in real private consumption. This is surprising because several high frequency indicators, such as, FMCG sales, car sales, two-wheeler sales, and credit growth slowed during the quarter.’ Edelweiss feels that higher growth could be on account of inventory build-up.

The 7-percent growth number caught almost all economists on the wrong foot, including those at renowned international agencies like the International Monetary Fund, who had expected the economy to fall to 6 percent growth in the second half of the current fiscal. The government, however, has said that the economy will grow by 7.1 percent in the current fiscal.

The following three elements have mainly contributed to the growth.

  1. Agriculture: There are various factors that have contributed to the 7 percent growth. First is the sharp jump in agriculture growth that has increased to 6 percent from 3.8 percent last year. The numbers show a sharp jump when compared to a contraction of 2.2 percent last year. Good monsoon and increased sowing led to a sharp jump in agriculture.
  1. Consumption: Even as media reports showed business slowdown, demand side pull has helped GDP growth. Both government and private consumption increased during the quarter. Private consumption increased by 10 percent during the quarter as compared to 5 percent in September quarter. In fact, private consumption expenditure is at its highest level since September 2012. This is the surprise factor as most of the high frequency indicators like two-wheeler sales, cars, consumable and non-consumable growth posted tepid growth during the period.
  1. Taxes: Though GDP numbers have overshot economist expectations by a mile, GVA has been closer to estimate. GVA, which is GDP sans taxes, has slipped at a sharper rate than the GDP growth. Clearly, taxes are playing a major role in GDP, a clear demonetisation effect that is unlikely to be replicated.

Though these three factors contributed to GDP growth there were others that pulled it down. Manufacturing sector has recorded a growth of 8.3 percent as compared to 6.9 percent last quarter they are much lower than 12.8 percent last year. Similarly, industry growth of 6.6 percent looks good when compared to 5.1 of previous quarter, but it is much lower than 9.5 percent in the same quarter last year.

While the government might like to take credit on the GDP growth number, the underlying fundamentals as measured by GVA are shaky. Government’s own estimate of GVA proves the point. The first half estimates of GVA have been lowered to 6.8 percent as compared to earlier announced 7.2 percent. Taking this into account the advance estimate for FY17 stands at 6.7 percent as compared to 7 percent earlier. This is lower than RBI’s projection of GVA.

The government will have an uphill task of maintaining the GDP rate going forward as the impact of agriculture growth and taxes will be missing. Further, with the fiscal deficit already overshooting the annual target, government is running out of ammunition. The real impact of demonetisation may only be felt in the March quarter.

-Shishir Asthana

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