At a recent seminar on the Budget at the Madras Institute of Development Studies, former Finance Secretary S Narayan raised doubts about official GDP statistics as they failed to capture the sizeable informal sector activity. His remark seemed prescient as, two days later, the Central Statistics Office released growth figures for the third quarter of the 2016-17 fiscal year. Now this quarter was crucial as it was in this period that the government had announced the scrapping of high-value currency notes, so all eyes were on the CSO figures to see how the demonetisation move had impacted the economy.
The CSO put GDP growth at 7 per cent for the third quarter which, prima facie , suggested that demonetisation had not impacted the economy as feared. The government predictably went to town about how the economy had shrugged off the note ban and so did newspaper headlines. But to give credit to Chief Statistician TCA Anant, he was more circumspect in jumping to this conclusion and said it was difficult to ascertain the impact of demonetisation on the economy.
“We will keep evaluating the numbers. I would not like to draw any conclusions at this stage,” was his qualified comment at the press conference.
Losers, gainers
The agriculture sector performed strongly in the third quarter, helping to push up overall numbers, with the gross value added rising sharply to 6 per cent in Q3 from 3.8 in Q2.
A closer look at the data tells us about a sharp decline in gross value added (a rough indicator of economic activity) in the finance and real estate sectors. In construction, growth dipped from 7.6 per cent in Q2 to 3.1 per cent and, in finance, from 3.4 per cent to 2.7 per cent.
Economists argue that the current GDP figures capture only the formal sectors and only after the informal sector data are factored in, can the real impact of demonetisation be assessed.
Data on corporate activity using annual accounts of companies are used for the new GDP data estimates whereas for informal sector activity IIP data are used. Also there are a lot on linkages between the formal and informal sectors that further muddy the waters. Needless to say, it is far easier to collect data for the formal sectors than the informal ones.
Political tussle
The BJP, not surprisingly, has tried to milk the GDP data in the political arena. Prime Minister Narendra Modi made a remark at an election rally in the ongoing UP elections about how ‘hard work’ had triumphed over ‘Harvard’ — a nasty and thinly veiled attack on the Congress’ P Chidambaram and Amartya Sen, both with Harvard connections and bitter critics of the demonetisation move. Sen had called demonetisation as a “despotic action that has struck at the root of the economy based on trust”.
Of course, the irony is that neither Chidambaram nor Sen were questioning the Indians’ capability or inclination for hard work; they were only pointing to how the note ban had made life difficult for the toiling masses. This finer point was, of course, lost in the heat and dust of the UP elections.
Shaktikanta Das, Secretary of Economic Affairs, was perhaps the first official to suggest that the economy had weathered the demonetisation storm, saying that the numbers “negate the negative speculation on demonetisation”.
The Congress and the Left parties did their bit to politicise the GDP figures. The Congress called the GDP numbers “highly suspect” and accused the Prime Minister and the Finance Minister of “misleading” the public. Congress spokesperson Anand Sharma said the PM and Finance Minister “remain in denial to further their narrow political agenda for short-term benefits and not addressing the real issues”.
Note ban impact yet to be seen
CPI(M) General Secretary Sitaram Yechury said: “If the CSO is to be believed then, without demonetisation, would the Q3 GDP growth rate be 25 per cent?”
Lost in all this political din is the Chief Statistician’s nuanced analysis that the CSO was still studying the numbers and it is too soon to draw conclusions.
But the consensus among economists, most associated with rating agencies and think-tanks with no political axe to grind, is that the effects of the demonetisation shock will take further time to play out and are more likely to be seen in the fourth quarter. The fact is that the economy was not in great shape before the note ban. As India Ratings’ DK Pant noted recently, with idle capacity in industry at 28 per cent and banks saddled with bad loans, private investments are unlikely to revive anytime soon.