As the government firefights to contain damages from its demonetisation move, Pronab Sen, the country’s former chief statistician as well as the chairman of the National Statistical Commission, says more liquidity should be released towards production than consumption to maintain a balance in the economy.
In an interview, Sen also says given the current disruptions in the economy, the CSO’s decision to issue the advance estimate of the country’s GDP growth for the entire 2016-17 fiscal a month earlier than its usual schedule (in view of the advancement of the Budget date) will be a tough task. Also, such an advance estimate will be pure guesswork. Excerpts:
How much of a decline do you see in the GDP growth for 2016-17 due to demonetisation?
It is too early to give a precise forecast, but I think the negative impact on GDP could be to the tune of 40 basis points this fiscal (the GDP grew 7.6% in the last fiscal and 7.1% in the first quarter of 2016-17, the slowest in six quarters). But this forecast doesn’t factor in any damage to the production side. The overall impact will be spread over both the third and the fourth quarters of 2016-17. A key factor will be how quickly demand is restored in the economy. Since consumer demand will take some time to recover fully, there could be some adverse impact on investments. But small industries will be hit harder by a potential slowdown in both demand and supply.
Do you see a fall in rabi output and a return of inflationary pressure by the beginning of the next fiscal following demonetisation?
If sowing is affected due to an inadequate availability of seeds and fertilisers, there could be a fall in rabi production. In such a situation, commodity prices will start reacting even before April (when rabi harvesting starts) and price pressure will be back. However, we have to wait to gauge the precise impact on sowing. It’s good that the government has allowed farmers to buy seeds with the old R500 notes, but it has to go beyond this. Roughly speaking, seeds account for 15% of the farmer’s cost of production, while fertiliser and labour make up for 30% and 50%, respectively.
What will be the impact on industrial production?
There will be some impact on the organised corporate sector due to a temporary slowdown in demand, but the unregistered manufacturing sector in which hard cash plays an important role will be more adversely affected.
What should the government do, on a priority basis, to minimise the damage to the economy from demonetisation?
The government must strike a judicious balance between easing liquidity for consumption and that for production. Since private final consumption expenditure accounts for around 35% of the total value of transactions in the economy (with the remaining 65% contributed to by the production side), roughly for every one rupee released for
consumption, around R2 should be released for production. So, over a half of liquidity that is being released should be directed towards production. Otherwise, the demand side will recover faster than the supply side, leading to an imbalance. Such a situation will stoke inflationary pressure.
The CSO has said it will now announce the advance estimate of the GDP growth for the entire 2016-17 fiscal on January 7, a month earlier than the usual date; the reason being the advancement of the Budget date to February 1. Do you think such an estimate, on which certain Budget projections are usually based, will give a clear picture of the true state of the economy?
Well, the advance estimate of GDP usually takes into account the second advance estimate of farm production released by the agriculture ministry. If the date is advanced to January 7, the CSO will have to base its forecast on just the first advance estimate of farm production. Similarly, given the disruptions in the economy caused by demonetisation, it will be very hard to estimate consumption expenditure as well as industrial production (for the fourth quarter of 2016-17) by the first week of January. In such a situation, the advance estimate of GDP for 2016-17 will be pure guesswork this time.