GDP surprises, grows 7% in Oct-Dec; full year estimates at 7.1%

The Indian economy grew at a surprisingly fast 7 percent in October-December 2016, from 7.4 percent in the previous quarter and 7.2 percent expansion in third quarter 2015-16, government data showed on Tuesday. The data, put out by the Central Statistics Office (CSO), also projected that Indian’s “real” or inflation-adjusted gross domestic product (GDP) will likely to grow at 7.1 percent in 2016-17, 0.8 percentage points slower than the previous year’s 7.9 percent expansion. While the projections have surprised many experts, the CSO has actually forecast a greater slide in gross value added (GVA), suggesting that deceleration is sharper than what the headline GDP growth numbers suggest. The CSO data shows that growth in GVA, which is GDP minus net taxes, will slow down to 6.7 percent in 2016-17 or 1.1 percentage points lower than 7.8 percent GVA growth in 2015-16. GVA serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the economy. The demonetisation effect and the resultant slowdown in household spending and corporate investment may well be hiding in the steeper fall in GVA growth estimates compared to GDP. 



Higher indirect tax collections in 2016-17 may also partly explain the more bullish GDP growth forecasts compared to GVA. The government’s GVA growth estimates are even more bearish than the Reserve Bank of India (RBI), which expects the GVA to grow 6.9 percent in 2016-17. The main GDP estimates, however, ran counter to analyst projections that had forecast a sharp deceleration in the broader economy caused by demonetisation. The first estimates released in January projected that India would grow 7.1 percent in 2016-17. These were based on incomplete corporate income and factory output data and did not fully factor in the effects of demonetisation. While there were signs of slide in consumer goods sales and muted investment activity because of the cash crunch, the CSO did not revise downwards India’s GDP growth in its second advance estimates on Tuesday. Most analysts and think-tanks have projected a sub-7 percent growth in based on consumer goods sales figures and third quarter corporate balance sheets. The International Monetary Fund (IMF) had projected that demonetisation will pull down India’s GDP growth to 6.6 percent in 2016-17, while the Economic Survey had said that GDP could slow down 6.5 percent. In fact, the Economic Survey said India’s GDP will at grow at 6.75 to 7.5 percent in 2017-18, tempering down expectations of an early revival in the broader economy still reeling under the effects of demonetisation. 

Contrary to expectations, the CSO estimates did not show demonetisation’s worst effects in the October-December GDP growth figures as came in the middle of the 50-day currency recall period from November 8 to December 31. The sudden move to outlaw Rs 500 and Rs 1000 currency notes was widely believed to have hurt household spending on aspirational and essential products that have been the edifice of the India growth story. Demonetisation has also upset families’ spending plans on cars, televisions and refrigerators that peak during the wedding season during October-March. Remarkably, however, private final consumption expenditure (PFCE)—a metric to measure changes in household spending—grew 10.06 percent in October-December 2016 compared to 6.7 percent growth in the previous quarter. While India remains the world’s fastest growing major economy ahead of 6.7 percent growth in China that is battling an industrial deceleration question marks have been raised over its ability to hold on to that status following the demonetisation drive. The manufacturing sector grew 8.3 percent during October-December, from 12.8 percent in October-December 2015-16 and 6.9 percent in July-September 2016-17, reflecting the poor consumer durables output and sales in the last few months following restricted access to cash. In the full year for 2016-17, the CSO has forecast that the manufacturing sector will grow at 7.7 percent from 10.6 percent in 2015-16. India’s factory output measured by the index of industrial production (IIP)—the closest approximation for measuring economic activity in the country’s business landscape-- already contracted (-) 0.4 percent in December from a growth 5.7 percent in November indicating signs of faltering industrial activity because of demonetisation. Good rains this year have likely helped in raising farm income. Agriculture is set to grow at 4.4 percent this year, compared to 0.8 percent in the previous year. In the third quarter October-December 2017, the farm sector (including forestry and fishing), grew at 6 percent compared to a (-) 2.2 percent contraction in the same period of 2016. It grew 3.8 percent in July-September 2016. Part of this expansion, however, can also be due to a low base-effect—a statistical phenomenon that magnifies small changes. India was hit by two successive droughts in the last two years.