GDP numbers: Experts taken by surprise

Gross domestic product (GDP) growth figures for the third quarter of FY17 at 7% have taken experts by surprise, who were expecting the numbers to show the impact of demonetisation. Even the Reserve Bank of India (RBI), in its recent monetary policy reviews, had cited the “likely impact of demonetisation” as one of the factors while refraining from cutting key rates. 

That apart, the International Monetary Fund (IMF) too, had recently warned India’s growth could to slow to 6.6 % in 2016-17 fiscal due to the strains that have emerged in the economy as a result of “temporary disruptions” caused by demonetisation.

Also Read: Inflation, Dollar, notes: Takeaways from the RBI's Monetary Policy review

Here is a quick compilation of how leading brokerages and research houses interpret the latest GDP numbers:


According to official statistics, demonetisation hardly dented economic momentum. India’s GDP growth slowed only marginally to 7% y-o-y in Q4 from 7.4% in Q3, above expectations (6%). Private consumption, fixed investment and industrial output growth all accelerated in Q4, with only the services sector witnessing a slowdown. 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.

We believe there could be three reasons for this discrepancy: (1) the inability of official statistics to capture the negative growth effects on the unorganised sectors; (2) positive base effects created by the 0.8pp upward revision in Q4 2015 GDP growth; and (3) companies may have showed their cash in hand as sales. In our view, official GDP statistics are significantly underestimating the growth impact of demonetisation.


GDP growth in India in 3QFY17 was recorded at 7% as compared to the growth rate of 7.4% recorded in 2QFY17. This data makes little sense as: (1) our extensive interactions with the SME community as well as (2) a cursory analysis of high frequency indicators such as bank credit growth suggests that economic momentum markedly decelerated in 3QFY17. 

Going forward, we re-iterate our view that even as GDP growth will pick up in 4QFY17 vs 3QFY17 and even as GDP growth will be higher in FY18 vs FY17, the level of GDP growth in FY18 will be lower than what it would have been the case if the Government had not enforced such a rapid pace of formalisation on the Indian economy.


Government’s role in contributing to the overall GDP has been increasing through government final consumption expenditure (GFCE) and gross fixed capital formation (GFCF). For a developing economy like India, this may crowd in private investments. Private Consumption has also been largely unaffected posting a robust growth both on quarter and year-on-year basis indicating a very limited impact of demonetization. Though there could be doubts raised regarding the data, the FY17 growth estimate of 7.1% may materialize. We believe this GDP print will alter market estimates of growth positively and would benefit stocks over the medium term.


Growth in manufacturing GVA accelerated to 8.3% in Q3FY17 from 8% in H1FY17, which is surprising as demonetisation would have likely hit December production. Note that the CSO takes into account value addition (proxied as EBITDA + salaries & wages) by the corporate sector while compiling GVA numbers. It uses growth in manufacturing IIP as a proxy for growth in the unorganised sector, in the absence of credible information on this segment. With the impact of demonetisation more pronounced for this segment versus the organised segment, usage of manufacturing IIP as a proxy implies that manufacturing GVA growth is overestimated. 

Private consumption posted robust growth, up 10.1% y-o-y in 3QFY17, while investment registered a pick-up, defying expectation of a demonetisation led slowdown. Given the fact that a lot of data seems to be counter-intuitive, we expect some downward revision in 3QFY17 GDP as more data, particularly from the informal sector, is captured. As a case in point, GVA data for the first two quarters of FY17 have been revised downwards, indicating slowdown in the economy, and that was before demonetisation.


Some of the numbers beneath the surface however signify the impact of demonetization. For example, growth in Construction and Finance sub-segments are at seven-quarter low and at an all-time low respectively 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%, it is not clear how construction activity is reviving in Q4FY17. Similarly bank credit growth is still at Dec 2016 levels. Overall, the GDP numbers seems to suggest we may have just leapfrogged the impact of demonetisation!

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