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01 Mar 2017

Indian GDP numbers announced, leave experts flummoxed

Official GDP numbers released yesterday show the Indian economy's annual gross domestic product growth for the October-December quarter clocked 7 per cent.

This was significantly greater than the 6.4 per cent which had been estimated by economists that were polled by Reuters a week ago.

Through this timeline, we would analyze if the numbers are justified, or if there is something more to it.

In context

Do India's GDP numbers give reason to rejoice?


What's driving GDP's growth

The GDP numbers are calculated taking into account key economic indicators such as private consumption, expenditure by the Government and net exports.

The latest government data indicates a sharp pickup in manufacturing sector and a year-on-year growth in private consumption hit an all time high since 2012.

Separately, government consumption and expenditure increased by a massive 19.9% compared to the same quarter last year.

Key reasons

How was GDP not impacted by demonetization?

GDP numbers have belied grim forecasts made by economists that demonetization would significantly dent economy.

However it appears that to counteract fallout of demonetization, the government mitigated aftermath by its 'strategic timing' and fiscal policy.

PM Modi explained that government waited for the festive period to end before announcing demonetization.

And as a 'counter-cyclical' fiscal policy, government ratcheted its spending to stimulate investment activity.

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Economists appear unconvinced with GDP numbers


Economists appear unconvinced with GDP numbers

Sonal Varma, Chief economist of Nomura, believe GDP statistics appeared to conflict with reality especially in context of increased private consumption.

Citigroup economists conceded some factors were positive for increased consumption but sharp drop in rural demand may not have been accurately captured.

Separately, India's new formulae to calculate GDP adopted in January 2015 have been disputed by many and called a "statistical illusion".


Conventional wisdom suggests cautionary approach

Experts questioned whether demonetization's blow to cash economy was properly calculated.

Prima facie, cash crunch dampens public spending, increases uncertainty and impacts private sector growth especially cash run small-medium businesses.

With respect to informal sector, BJP leader Subramanian Swamy said calculations were based on "guess-work" as opposed to raw-data and said it was too soon to know if demonetization's blow to economy was finished.

GDP numbers should not be interpreted in isolation

Holistic approach

GDP numbers should not be interpreted in isolation

GDP numbers though very pertinent, if viewed in isolation, may not depict a comprehensive picture.

Other economic indicators, which the GDP numbers are in stark contrast to, must also be taken into consideration.

Several factors such as corporate valuations, massive job losses, rise of non-performing assets in banks, massive drop in investment in India must be viewed cumulatively to determine the economy's health.

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