09/01/2017 7:08 PM IST | Updated 09/01/2017 8:10 PM IST

How The Govt Has Conveniently Chosen To Ignore Demonetisation For Its Annual GDP Forecast

Just a guesstimate?

Rupak De Chowdhuri / Reuters

On Friday, a full month before schedule, the Indian government released its predictions for the economy's annual growth, without taking into account the biggest economic event in recent history – demonetisation.

The reason behind the partial numbers and the rush in releasing them is to help Finance Minister Arun Jaitley with an early budget and the presumed "volatility" in certain numbers post-demonetisation and scrapping of old Rs 500 and Rs 1,000 notes. One such number was the deposits coming back into the banks. That number is still up in the air as the Reserve Bank of India has been uncharacteristically mum on the subject in recent weeks, leading to varying estimates floating around.

For its latest forecast, the Central Statistics Office drew up its 2016-17 GDP estimate – projected at a whopping 7.1 per cent – based entirely on data available only for the first seven months in the year – before demonetisation even kicked in.

Another key number that's amiss is the industrial output, which is measured by the Index of Industrial Production, for November. India's IIP has been in decline over the past many months.

But far from being touted as an incomplete estimate, Friday's premature GDP forecast will likely work as the benchmark for Finance Minister Arun Jaitley's upcoming budget on February 1.

That is because the updated GDP figures adjusted for demonetisation won't be available before the end of February, a full one month after the country's annual budget is released and its policies widely consumed by the public. It's important, therefore, that the latest GDP forecast is seen for what it is – an unreliable predictor of the economy's health at this stage.

It's important, therefore, that the latest GDP forecast is seen for what it is – an unreliable predictor of the economy's health at this stage.

Now it isn't that the CSO didn't have the data. CSO's Chief Statistician T C A Anant has claimed the government had all the relevant data but a "conscious decision was taken to not make projection using the November figure" given the volatility in those figures. That begs the question: couldn't the CSO have at least released some provisional figures for the Oct-Dec period?

Unsurprisingly, the latest projection by the government is being treated by several economists as overly optimistic, especially as key economic numbers have been decline. "I am very worried with the projected growth rate," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Co. "Take demonetisation into account, the rate will substantially drop," he said, adding that he expected full-year growth to be well below 6.8 per cent. Rabobank's Michael Every has called the projection a "very, very brave guess at this point" projecting numbers until end of March given we are only a few days into January.

Let's look at some the more worrying economic numbers that aren't in dispute:

  • Slowdown in manufacturing likely to be 7.4 per cent compared to 9.3 per cent in previous year. As Of October, the sector shrank by 1.18 per cent, the lowest in five years.
  • India's industrial growth, as measured by the Index of Industrial Production (IIP), during the first five months of the current fiscal, was the worst in a decade at -0.27 per cent, according to Bloomberg.
  • Construction sector growth to decline 2.9 per cent from 3.9 per cent.
  • Negative growth in the mining sector (–1.8%) as compared to 9.3 per cent growth in 2015-16.
  • Declining private consumption. This is expected to continue to decrease to 6.5 per cent. As of June quarter, private investment as a proportion of GDP fell by about 3 percentage points from a year ago.
  • Annual growth in private spending slowed to 6.7 percent in June quarter from a 7 percent increase in the same period last year. The slowdown had more than offset a 19 percent annual surge in public spending.
  • Growth rates in trade, hotels and transport sector, which make up the largest services segment, expected to shrink further to 6% from 9%.
  • Services activity has been in decline for two straight months. The Nomura Composite Leading Index (CLI) for India for early 2017 had slumped to the lowest level since the series began in 1996 and is consistent with GDP growth of below 6 per cent, it said.
  • Investment demand may enter negative territory at -0.2%.
  • 'Net taxes on products' is expected to grow at 8.5 per cent, significantly lower than 11.9 per cent in 2015-16.
  • Overall growth in financial services, real estate, insurance and professional services is expected to slow down to 9 per cent in 2016-17, lower than the 10.3 per cent from the previous fiscal.

So how exactly is the government justifiying its optimistic projections given the bleak numbers?

There seem to be some sectors that had been on the upswing until October.

  • The Monsoon effect. By many estimates, India had a normal monsoon this year, and the farm sector growth in GVA terms is expected to increase to 4.1 per cent this year, compared to 1.2 per cent last year.
  • Public expenditure or government spending. This has been one of the biggest drivers of GDP numbers this year and is expected to rise to 12.8 per cent from 6.6 per cent last year. However, reliance on this measure alone is "dangerous and unsustainable" in the long-term, Mihir Sharma of Bloombergpointed out earlier.
  • Seventh Pay Commission-driven rise in consumption. A big hike in wages for over 10 million government employees from the seventh Pay Commission should spur consumer spending.

There are many other data points that are yet to come that may further drag on some of these positive numbers such as the second round of advanced estimates on the agricultural sector, which reportedly has also been hit by cash crunch. Private consumption is also expected to decline.

But given the humongous scope and the huge disruption demonetisation has caused to citizens, shouldn't the economic projections of an emerging power like India be more transparent?

It's important to ask whom are these early estimates aimed at? Given the limited and vague data, even the early budget exercise runs the danger of becoming a scramble based on half-baked numbers.