Q3FY17 GDP might be resilient but demonetisation had an impact on GVA

The one number to read from the second advance estimates of national income for the year 2016-17 was how much of a sucker punch has been demonetisation for the Indian economy. 

At 6.6% the estimate of Gross Value Added (GVA) at basic prices for the October-December quarter has pushed down India’s GVA for the year to 6.7%. Gross Value Added is defined as the value of output less the value of intermediate consumption. The data was released by the ministry of statistics and programme implementation on Tuesday. This is far better than what was anticipated as the table shows and would indicate that demonetisation has crucially not cut down consumption in the economy, contrary to dipstick indicators. 

Based on the strong reading, the first advance estimate for the year had put the GVA growth rate at 7%. The government advanced the date by a month to 6th January to account for the new budget dates introduced from this fiscal. Statisticians add to GVA, the value of taxes on products and deduct subsidies to arrive at the conventional gross domestic product (GDP). 

All research agencies had forecast that the GVA and GDP estimates for the Indian economy will slip because of the slowdown in consumption in the economy, due to demonetisation. Private final consumption expenditure as per Tuesday’s data accounts for 58% of the GDP for the Indian economy. A slowdown here was bound to have adverse impact on the economy. Even without the impact of the demonetisation private consumption had eased up from last financial year in the first two quarters to 55.2%. It has improved since. Slower growth rate of salaries and a weaker job climate due to low investments by Indian companies and a similar weakness in the global markets had already made consumers cautious. 

The impact of demonetisation is thus expected to wear off far more quickly. The RBI in its February Bi-Monthly assessment of the economy had estimated there will be 35 basis points impact on the growth economy. Tuesday’s figures show it is even less. 

According to the central bank, “Growth is expected to recover sharply in 2017-18 on account of several factors." It lists them as rebound in spending by consumers as cash comes back into the economy, which in turn should spur retail services; further easing of bank funding to projects as banks have higher liquidity and the emphasis in the budget on higher capital spending.