We may have just leapfrogged the impact of note ban: Soumya Kanti Ghosh

Interview with chief economic advisor of SBI

Contrary to expectations of growth slowing down in Q3 FY17, data released by the Central Statistics Office (CSO) shows the economy grew at seven per cent in the third quarter. Ishan Bakshi spoke to Soumya Kanti Ghosh, group chief economic advisor at SBI, to understand the divergence between expectations and the CSO’s estimate. Edited excerpts:
 
GDP growth in the third quarter came in higher than expected. Economists were expecting growth to slow down post demonetisation. What explains this?
 
The Q3FY17 estimates are crucial in the sense that it should have given the impact of what happened in the economy during those two months of demonetisation. Despite the upward revision of Q1FY16 and Q2FY16, GDP estimates for Q1FY17 and Q2FY17 have been revised upwards indicating significant improvement in economic activity in the first half of FY17. The  steep downward revision of Q3FY16 (from 8.4 per cent in Q2 to 6.9 per cent in Q3 of FY16) has, in turn, led to higher growth in Q3FY17, thus, masking the impact of demonetisation in the Q3  figures. Even then it seems a little difficult to understand that the positive effect of downward revision in previous year is strong enough to overpower the negative effect of demonetisation in Q3FY17.

 

Some of the numbers beneath the surface, however, signify the impact of demonetisation. For example, growth in construction and finance sub-segments is at 7 per cent and at an all-time low in the current base year. But what is intriguing is that growth rates of these segments show a significant recovery in Q4. With cement dispatches for January 2017 declining by a whopping 13 per cent, it is not clear how construction activities are reviving in Q4FY17. Similarly, bank credit growth is still at December 2016 levels.
 
The manufacturing sector grew at 8.3 per cent in Q3, despite PMI manufacturing slowing down. Please explain.

 
During Q3, the SBI composite index was also showing a contraction. The Y-o-Y index was hovering below 50, except December 2016. This may be surprising.
 
Given that the economy has come out of the third quarter relatively unscathed, is growth as robust as it appears? What are your projections for FY17 and FY18?
 
We believe GVA should be a better approximation. On an overall basis, the Gross Value Added (GVA) at Basic Prices for Q3 FY17 has been estimated at 6.6 per cent. GVA growth is estimated to grow at 6.7 per cent  for FY17, vis-à-vis 7.8 per cent. We still believe FY17 growth could be lower than the current CSO estimates. The good news is that FY18 growth could move up faster if demand comes back faster post remonetisation, as the economy becomes cleaner. Overall, the GDP numbers seem to suggest we may have just leapfrogged the impact of demonetisation.