The Union Ministry of Statistics and Programme Implementation has released its revised estimates of national income for 2017-18, in advance of the Union Budget due to be presented on Friday. Growth in real gross domestic product (GDP) at constant 2011-12 prices for that fiscal year is now pegged at 7.2 per cent as distinct from to 6.7 per cent in the advance estimates. Somewhat surprisingly, the second revised estimates of GDP growth at constant prices in 2016-17, the year of demonetisation, have been revised upwards by over a percentage point, from 7.1 per cent to 8.2 per cent. Relatively slow growth in 2017-18, when compared to 2016-17, is explained by the Central Statistics Office as due to a slowdown in manufacturing, communications, agriculture and mining.
Taken at face value, this data can be seen as both good news and bad news. On the one hand, it appears that growth immediately following the demonetisation exercise of November 2016 was not too badly affected. On the other hand, it appears there might have been something of a deceleration following high growth in 2016-17. Looking at the other side of the picture, gross fixed capital formation (GFCF)— a commonly used indicator of investment — as a proportion of gross domestic product went up marginally from 28.2 per cent to 28.6 per cent in the two years under consideration. However, much of this was driven by government spending, and the proportion of household investment in GFCF fell. In other words, it is not clear that private investment recovery had taken hold in 2017-18. It is also worth considering that this data suggests that the impact of demonetisation was far more staggered than previously believed. Anecdotal reports and qualitative studies suggesting that it is still having an impact on the availability of money and thus price-setting in rural areas should, therefore, be investigated with greater care.
While it may always appear good news that the economy has in the past been growing at more than 8 per cent a year, it is nevertheless necessary to examine this data carefully. The fact is that demonetisation was traumatic and all other forms of high-frequency data do not corroborate the notion that the economy was growing at 8 per cent during that financial year. Given the new and controversial back series for GDP data with 2011-12 as a base year, it is also worth considering that this second revision suggests that the economy during the year of demonetisation was growing at rates comparable to, and in cases higher than, the boom years of the 2000s. This does not completely pass the smell test. In December last year, the government announcement regarding the back series of GDP data with 2011-12 as the base year created a huge controversy. The back series, which provided the GDP growth data from 2004-05 to 2010-11, seemed to run contrary to all the other available evidence for the years in question, raising doubts on the ability of the back series to accurately reflect what happened during those years. With the latest GDP data, questions that were being asked about the credibility of official data will now become even louder and more pressing. The government must take these concerns on board.