CSO springs a surprise

The second advance estimates of national income by the Central Statistics Office (CSO) were perhaps more eagerly awaited than any data release in recent memory. That is because they not only provide the full-year growth estimates of gross domestic product (GDP) but also the quarterly GDP estimates of the third quarter (Q3). The major takeaway from the numbers is that demonetisation’s impact on growth has been extremely muted, with minimum impact on various sectors. In the process, the CSO surprised just about everyone outside the government by stating that it expected GDP growth for the current financial year to be 7.1 per cent. This is the same number that the CSO quoted in its first advance estimates, which were released in January; the crucial difference being that the first estimate did not take into account the impact of demonetisation. By staying put at an estimate of 7.1 per cent, the CSO is essentially stating that the demonetisation of currency notes amounting to 86 per cent of the money supply by value did not have any real impact on the growth prospects of the Indian economy. The growth for Q3 per se is pegged at seven per cent. 

However, even in the status quo, there was some rejigging on quarterly data. So Q1 and Q2 growth were revised upwards to 7.2 per cent and 7.4 per cent from 7.1 per cent and 7.3 per cent, respectively. Among the less surprising data points was the fact that the agriculture sector grew at six per cent in Q3. The sector was expected to do better after two years of droughts. Thanks to a good monsoon, the record grain production numbers present a huge reversal of fortune in this crucial sector of the economy. Part of this story, though, will also be explained by a massive base effect: In the same quarter of the previous financial year, agriculture contracted by 2.2 per cent. The other sectors that grew at a reasonable clip were mining and quarrying (7.5 per cent); manufacturing (8.3 per cent); trade, hotels and transport (7.2 per cent); and public administration, defence and other services (11.9 per cent). 

However, the real surprise package was the 10 per cent growth registered by private final consumption expenditure at a time when some of India’s largest consumer-focused companies showed a sharp contraction in sales volumes. Even in sectors that posted better than expected results, data showed a massive build-up of inventories. So from paints to two-wheelers, there has been evidence of an adverse impact. But the CSO data on private consumption point to the contrary. The sudden and sharp turnaround in gross fixed capital formation (or private investment) was also least expected. But after contracting for three successive quarters, and that too at an increasing pace, this has actually grown by 3.5 per cent in Q3. 

The GDP data can be viewed in two ways. One, that the government’s remonetisation was so well implemented that even after suddenly reducing the money supply by 86 per cent the economy was not affected. The other is to reserve judgement and wait for the Q4 data to come through. The latter is what many economists, who predicted growth of less than six per cent for Q3, have done. It is quite plausible that revisions to Q3 data, as well as the impact on Q4 growth, will resolve the mystery.

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