GDP Surprise

Why in news?

CSO has released the data for the third quarter of 2016-17 (Oct-Dec) and concluded that the GDP in Q3 grew by 7% and the growth rate for the whole year would be 7.1%.

Did demonetisation impact economic growth?

• The CSO data did not answer that question.
• The argument that demonetisation did not and will not have a negative impact on the economy is very hollow and immature.
• Even the former CSO chief statistician, after reviewing the data, has concluded that the data (of 3^rd quarter) is deficient and the growth rate for the whole year is likely to be revised downward to 6.5%.
• After the changeover to the new methodology, the CSO publishes estimates of Gross Value Addition (GVA) and GDP.
• GVA growth rates during three years is given below:

• Demonetisation affected every sector of the economy except three.
  • it did not affect government expenditure. And the govt actually increased its spending after November 8, 2016;
  • it did not affect the monsoon. Since it was bountiful, it boosted agricultural production; and
  • it did not affect the revenues of utilities. Actually demonetised notes were allowed to be used for paying utility bills.
• Therefore, if we look at the GVA growth rates after excluding government, agriculture and utilities, it will show the real picture of the economy. And it looks like this:

What conclusion can be made from above?

• From the above data, it is clear that economic growth in the non-government, non-agricultural economy slowed down since Q4 of 2015-16.
• Demonetisation that happened in the middle of Q3 actually accelerated the decline of economic growth.

Why the situation is still bleak?

• While the GVA/GDP data may have given a surprise, other indicators point to an economy that is not investing more, not producing more and not creating more jobs.
• Compare the GVA growth numbers in Q3 of 2015-16 and Q3 of 2016-17. In the Mining, Manufacturing, Construction, etc., the GVA growth number has declined sharply in 2016-17.
• In Q3 of 2016-17, the Index of Industrial Production (IIP) recorded a meagre growth of 0.2%.
• Bank credit growth to industry was negative at 4.3%.
• By September 2016, net fixed assets of all firms had declined by 9.36%.
• When data for the informal sector is also captured, the GVA growth number will be moderated and will be lower.

Source: The Indian Express