Economists find GDP data intriguing, say figures don't add up

They believe that the key reason behind such a high growth rate could be "a steep downward revision" of the year-ago base period.

Government data showing a surprise 7 per cent GDP growth in the October-December quarter has left many economists puzzled who say the figures 'do not add up' and may be "masking" the real impact of demonetisation.

The economists finding the data intriguing include those from public sector giant SBI as well as global majors like Nomura and Bank of America Merrill Lynch.

They believe that the key reason behind such a high growth rate could be "a steep downward revision" of the year-ago base period.

Besides, they said that many companies might have showed their cash in hand as sales, while the official data may have been unable to capture the negative growth effects of demonetisation on the unorganised sectors.

In a report published on Wednesday, Nomura went on to question whether India's growth statistics was "fact or fiction" and said the "official data are underestimating the reality as they rely largely on organised sector data".

SBI chief economic adviser Soumya Kanti Ghosh said the third-quarter estimates, released by the government on Monday, was crucial in the sense that it should have given the impact of what happened in the economy during those two months of demonetisation, announced on November 8.

"The steep downward revision of Q3 FY16 has in turn led to higher growth in Q3 FY17, thus masking the impact of demonetisation in the Q3 figures. Some of the numbers beneath the surface however signify the impact of demonetisation.

"Despite the upward revision of Q1 FY16 and Q2 FY16, GDP estimates for Q1 FY17 and Q2 FY17 have been revised upwards indicating improvement in economic activity in first half of current fiscal," he wrote in a report.

According to official statistics, demonetisation hardly dented economic momentum and India's GDP growth slowed only marginally to 7 per cent year-on-year in the fourth quarter from 7.4 per cent in the third quarter of 2016.

"This does not add up. High frequency real activity data released since demonetisation suggest that consumption and services were hit after demonetisation because they are more cash-intensive," Nomura said.

It further said that "there could be three reasons for this discrepancy. First, the inability of official statistics to capture the negative growth effects on the unorganised sectors; second, positive base effects created by the 0.8 pp upward revision in fourth quarter 2015 GDP growth; and third, companies may have showed their cash in hand as sales.

"In our view, official GDP statistics are significantly underestimating the growth impact of demonetisation," Nomura added.

Kotak Institutional Equities said "the demonetisation impact was inconspicuous as data signalled mixed trends.

However, the data coverage is not yet holistic as unorganised sector remains to be completely factored in."

The domestic brokerage firm said that even as the print had more informed inputs at hand, specifically IIP, revised crop production estimates and listed companies' financials until third quarter of this fiscal, "the data coverage is still incomplete".

Specifically, the cash-sensitive unorganised/SME segment is still not covered, implying that FY2017 estimates do not give a holistic picture, it added.

It further said that a more complete picture of the economy will be reflected only in the first revised estimate of FY2017 due to be released in January 2018.

Private sector lender IDFC Bank said services sector has been hit the hardest by the demonetisation exercise, but the economy was able to show a 6.6 growth on GVA basis due to an uptick in agricultural activity and industrial sector.

"Services sector did see an impact of demonetisation with growth sliding to 6.8 per cent from 8.2 per cent in Q2 FY17. The decline in services growth is attributable to financial, real estate and professional services category," a note from the bank said.

According to Bank of America Merrill Lynch (BofAML), demonetisation hit growth by over 100 bps.

"Although December quarter (GVA) growth, at 6.6 per cent, surprised on the upside, it is still lower than the 7.5-8 per cent projected by us in the second half of 2016-17 before the demonetisation shock. In the old GDP series, growth continues to stagnate at 4.5-5 per cent levels," it said.

Echoing similar sentiments, analysts at Capital Economics said in a note: "Official GDP data showing only a gradual slowdown in Indian growth in Q4 is hard to square with other more reliable monthly data which show activity slowed sharply towards the end of last year following the introduction of demonetisation in November."

The Congress party also dubbed the GDP numbers as "surprising" and "highly suspect" saying that it could dent India's global credibility and accused the prime minister and the finance minister of "misleading" the public.

"The GDP numbers that have been released are surprising and highly suspect. The GDP growth as projected is questionable and will also undermine the credibility of Indian data globally," Congress spokesperson Anand Sharma said.

However, Finance Minister Arun Jaitley said that third quarter GDP data belies the exaggerated claim by many that rural sector was in distress as agri growth is at record high.

Jaitley further said that remonetisation is up substantially and its combination with economic resilience has shown some signs of return of growth.

"The Indian economic growth is likely to pick up further in coming quarters," Jaitley said.

Photograph: Rupak De Choudhuri/Reuters