India's Chief Economic Advisor Arvind Subramanian strongly cautioned journalists on Tuesday to not compare India's year-on-year GDP numbers to calculate the impact from demonetisation, which he stressed was a "radical experiment" with few parallels.
"Many people will say 2015-2016 growth was 7.6 per cent and 2016 growth is Y...the difference is the demonetisation impact– incorrect," he said. "The more appropriate way is to do what would have happened in 2016-2017 without demonetisation and with demonetisation."
He added that CSO's advance estimates are based on baselines that don't include demonetisation impact, which also forms the basis of the economic survey's impact on the GDP numbers, projected at about 7 per cent.
He cited difficulty in available macro-data in coming up with accurate analysis to project an impact of demonetisation, noting that India's GDP collection methods will probably also "underestimate" the impact on the informal sector, which analysts believe has been hit severely by demonetisaion. The survey instead uses other indicators.
He also called IMF's recent lowering of GDP estimates for India at 6.6 per cent compared from an earlier 7.6 per cent an "incorrect" measure saying they were based on "overly-optimistic" earlier projections. He added that it would be inappropriate to compare those projections with that of the government as they use different "baseline" numbers to calculate their individual GDP numbers.
While reiterating the potential long-term benefits of demonetisation, he acknowledged the short-term costs of the demonetisaion exercise and the resulting impact on growth as less cash drags down on demand as well as supply of industries that rely on cash payments, in addition to lingering economic uncertainty from the cash crunch.
Subramanian forecasts India's 2016 Real GDP to slow down to quarter to half a percentage point, he noted. "The overall picture is mixed. One should tentatively conclude there will be an impact on GDP -- the question is how much," he said.
According to the fine print of the economic survey, it is too early to quantify the magnitude and long term effect of demonetisaion. "It will take several years to see the impact of demonetisation on illicit transactions, on black money, and on financial savings. But there are some signs pointing to change," it said.
Subramanian also cautioned that the success of demonetisaion will hinge on whether critical follow-up steps such as fast remonetisation are taken.
Separately, he slammed ratings agencies such as Standard & Poor's for denying a sovereign upgrade to India based on what he called "astonishingly inconsistent standards" compared to the ratings that have been assigned to China.
He pointed to the ratings upgrade given to China despite the country's decline in GDP growth and increase in credit-to-GDP rations – important risk indicators that don't merit an upgrade, he suggested, saying these ratings ought to be questioned.