The 7.1% GDP growth projected for the current fiscal by the Central Statistics Office (CSO) — thanks to an impressive 7% expansion in Q3 propped up by private final consumption expenditure (PFCE) rising to a 4-year high of 10.1% despite note ban — could be trimmed as early as May when the first set of full-year growth data are announced, analysts said. The advance estimate of the Q4 GDP numbers is usually based on certain trends witnessed in earlier years, and since demonetisation of this magnitude doesn’t have a precedent, such an estimate doesn’t really capture the actual churnings in the economy due to the note ban and the impact on GDP. Also, the latest growth estimate is based primarily on data (corporate filings etc) relating to the formal sector, which is believed to have weathered the impact better than the informal sector. So, until wider data points giving some insight into the informal sector are made available, the impact of note ban can’t be gauged more accurately. The informal sector accounts for roughly 40-45% of GDP.
Pronab Sen, former chairman of the National Statistical Commission, told FE that quarterly estimates don’t adequately capture the consumption side of the economy, as hard data, especially on private investment and household consumption, are not yet available for the relevant period. “Once the full-year GDP data are available (in May), the growth projection for the PFCE for earlier quarters will also be revised suitably,” he said. The fourth quarter, which will witness the first full-quarter impact of the note ban, could see a slowdown in demand, he added.
Last month, the CSO announced the first revision of the GDP data for the 2015-16 fiscal, raising the growth rate to 7.9% from 7.6% reported earlier, though the second revision of the 2014-15 data kept the pace of expansion unchanged at 7.2%.
Stating that official GDP data are significantly underestimating the growth impact of demonetisation, Nomura’s Sonal Verma said there could be three reasons for the upside surprise: the inability of official statistics to capture the negative growth effects on the unorganised sectors; the downward revision of the GDP growth estimate for Q4 2015 by 0.8 percentage points to 6.5% y-o-y, creating a favourable base effect for comparison; and the possible declaration by companies showing their cash in hand (after demonetisation) as sales, leading to a notion of a higher value addition in these specific sectors.
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Samiran Chakraborty, chief economist (India) at Citibank, said the acceleration in private final consumption demand from 5.1% in Q2 to 10.1% in Q3 appears optimistic in the wake of the severe cash crunch. Though a combination of good monsoon, pay commission awards and festival demand had been supportive of consumption demand, the sharp decline in rural demand indicator suggests the “latest data point could be prone to revision in subsequent releases”.
The rise in the pace of growth of PFCE may have been led by improved sentiment during the festive season following the pay revision for Central government employees and pensioners and the healthy kharif harvest, said Aditi Nayar, principal economist at Icra. “Nevertheless, the impact of note ban would have dulled consumption of many items in second half of Q3 FY2017, as highlighted in particular by ’ volumes,” she added.