India's latest quarterly GDP numbers have again earned the country the 'fastest growing economy in the world' tag. However, economists -- both domestic and international -- are seriously doubting those numbers, given the shock from the cash crunch in the wake of demonetisation, which scrapped 86% per cent of the currency of a largely cash-dominated economy.
How fast did the economy grow?
India claims its economy grew at 7 per cent in the October-December quarter immediately after demonetisation, which was announced in early November, significantly higher than analyst estimates of 6.4 percent. The number is also higher than the prediction made by the government's Economic Survey, which was presented not too long ago, and estimated that GDP will likely slow down by 0.25-0.5 percentage points overall in the next fiscal.
India's latest official data says that the economy grew on the back of consumer spending, against a decline of government expenditure. However, this is not supported by the cash-strapped households and the earnings reported by consumer goods companies in the last quarter, Reuters reported. The Reserve Bank of India also cited in its survey a sharp fall in consumer confidence following demonetisation, with households uncertain about income, employment and spending.
The alarm bells
No one doubts the severe shock that demonetisation unleashed on the cash-dependent informal economy, which makes up about 40 per cent of India's GDP. Auto sales, especially two wheelers and mobile phone purchases, slowdown in rail freight, services tax, recepits, were all hit following demonetisation.
However, two different sets of numbers are particularly alarming, as they have suddenly turned positive, meriting a longer explanation. These include manufacturing GDP, which grew sharply at 8.3 per cent in the quarter even though the indicator of manufacturing in the index of industrial production contracted by two percent in December.
Bank lending was also severely hit in December following demonetisation. However, private investments that usually correspond to the bank credit growth, grew sharply at 3.5 per cent in the quarter after three consecutive quarters of decline.
Additionally, services that depend on government spending also grew faster in the quarter, at a time when overall government spending has fallen.
Japanese securities house Nomura has noted the latest GDP data "doesn't add up," pointing to high-frequency real activity data that has shown that consumption and services have fallen.
"The message from the GDP numbers doesn't tally with what we see on the ground," Sonal Varma, an economist with Nomura in Singapore told Reuters. "It does become important to supplement your analysis with additional information."
Economists from State Bank of India say that while the downward revision of the numbers from the 3rd quarter last year could have "masked" the impact of demonetisation, "even then it seems implausible that the positive effect of downward revision in previous year is strong enough to overpower the negative effect of demonetisation in Q3."
Is there an explanation for the discrepancy?
Many economists have pointed out that the numbers only partially reflect the state of the economy, as the government doesn't account for the informal sector in its current methodology, which makes up about 40 per cent of the country's output.
"Specifically, the cash-sensitive unorganized/SME (small and medium enterprises) segment is still not covered," said Kotak Institutional Equities, adding the "data coverage is incomplete."
Another explanation is that the base numbers used in India's last year's third quarter data were improved last year which may have resulted in sharp growth in the latest quarter, along with many companies showing cash-in-hand as sales, according to Nomura. Good monsoon-led agricultural growth and public administration may have also "cushioned" the negative impact from demonetisation, according to Religare Capital Markets, reported Mint. It, however, added, "Excluding these two segments, GVA growth dropped to 5.8% in the December quarter from 6.9% in the first half of fiscal year 2017 and 9.3% in fiscal year 2016, somewhat reflecting the impact of demonetisation."
India also revised its GDP methodology two years ago, which suddenly shot up India's GDP growth.
What's likely to happen now?
Many economists say that the government may revise downward these numbers in the coming months and a clearer picture is likely in May when the government releases further estimates.
"The economy would have got hurt. Anecdotal evidence suggests cement sales decreased, footfalls in restaurants dropped, and so did automobile sales. The first estimates of GDP do not capture the disruption. As more information becomes available, a downward revision is possible," D K Joshi, Chief Economist, CRISIL told the Indian Express.
Many brokerages such as Mumbai-based Ambit Capital are in the process of coming up with their own measures to gauge economic activity. This is similar to what's done in China, where the official GDP numbers are widely doubted.
With inputs from Reuters