GDP and note ban: Data presents a rosy picture but fails to convince

For anyone who understand, or at least deludes himself to believe that they understand, how the economy works, the latest data by the Central Statistical Organisation (CSO) on the quarterly gross domestic product (GDP) should come as a shock. Ever since the Prime Minister stunned the nation by announcing demonetisation on November 8 last year, economists of all hue have been projecting a hit on GDP growth — some even projecting a dip by 3.5 percentage points. However, none of those apprehensions have come through. The CSO data — the Second Advance Estimate for the current financial year — has pegged the full year GDP growth at 7.1%. This is exactly what it was in the First Advance Estimates released in January but those, crucially, had not taken into account the impact of demonetisation.So the main takeaway is that demonetisation did not have any impact on the growth rate of the economy. 

To be sure, this was not the only thing that was alarming aspect of the the third quarter GDP data. Two more data points stand out. First, the gross fixed capital formation (GFCF), which indicates the growth or contraction of private investment in the economy. For the past three quarters — that is, Q4FY16, Q1 FY17 and Q2FY17 — GFCF had contracted (Year on Year) and that too at an increasingly faster clip — 1.9%, 3.1% and 5.6% respectively.

In Q3FY17, however, against all economic reasoning, this variable has registered a growth 3.5% (YOY). This is odd because businesses were sitting on inventory, working way below full capacity and given the expected impact of demonetisation on demand, one would have expected businesses to stay away from investing. But, of course, the data doesn’t agree. The third remarkable data is on private final consumption expenditure (PFCE), which shows what happens to the consumption of private individuals in the economy, as against the government. Again, this variable has shot up by 10% in Q3 FY17, much against any theoretical understanding or anecdotal evidence that is available.

In short, the message from the government’s data bank is that demonetisation and the ensuing remonetisation was so effectively implemented that the Indian economy just did not register it. Now, some might call it a crime and accuse the government to fudging numbers but, to borrow the logic that is applied in jurisprudence: The government will be presumed innocent until proven guilty. How so? There is an innocuous concept in data called “revised estimates”. My sense is that the government has only kicked the can down the road. Chances are it will have much to explain when revisions happen. But again, we should not get ahead of ourselves.

For the moment, sleep tight!