The Central Statistics Office (CSO) will release third quarter and second full year advance estimates for gross domestic product (GDP) growth for 2016-17. These are the first growth estimates to be put out by CSO after demonetisation and currency recall was implemented last year. Demonetisation triggered a cash crunch which caused sudden drop in sales of consumer goods, particularly FMCG products and a wary investment cycle. This will shed light on the extent of demonetisation’s impact on economic growth besides other factors.
The figures put out by the CSO in January predicted that the GDP growth will be 7.1 per cent for FY 2016-17 as compared to 7.9 per cent the previous fiscal. The calculations were based on non-comprehensive and possibly incomplete corporate income and factory output data. In all, the CSO is expected to release negative revisions in the GDP growth data as a result of the economic reforms.The CSO will release the national income data at 5:30 pm on Tuesday. Here are some things to look out for:
Demonetisation was one of the most radical reforms taken by this government. Economists were divided on whether the move was in the best interest of the Indian economy. Several economists predicted decline in GDP growth rate by at least 1 per cent. Some, like Ambit, went as far as at least 3 per cent and even the conservatives predicted at least 0.5-1 per cent loss in GDP growth. Anything below 6.5 per cent will be a four-year low, going back to the UPA years when the economy was recovering from recession. The figures will address the conflict in predictions among leading economists in the country.
Third quarter effect
Most experts predict that the third quarter figures won’t be much better than 6 per cent. The period between October and December that included the 50-day currency recall after demonetisation and amid cash crunch, weak investment sentiment and drop in sales could well drive down the annual prediction figure.
Role of remonetisation in recovery
Many in government are banking on remonetisation to pull the economy back on the fast growth track. The government claims that the remonetisation exercise is nearly complete and the flooding of the system has probably replenished the system of the liquidity crunch. The Reserve Bank of India observed in its recent monetary policy review in January that the consumer discretionary demand is likely to go up in the fourth quarter. The RBI observed that cash driven sectors like hospitality, trade, logistics and the larger informal and unorganised sector would now see renewed activity.
Ideally, these assumptions suggest that fourth quarter will be a recovery period. Whether or not the CSO is optimistic enough will be clear in the data that is to be released today. The estimates for growth of the fourth quarter (January-March) are usually calculated from the full-in-year predictions and the real rates of growth seen in the first three quarters.
Nominal growth rate put out by the CSO will give a hint of the economic recovery process in the next fiscal. Demonetisation slowed down economic activity massively and the speed of revival may be inferred from nominal growth rate figure.
Real GDP growth is different from the nominal growth. The former is essentially inflation-adjusted GDP. What it means is Real GDP growth rate is actually derived by deducting the nominal GDP or growth in actual by the price deflators or commonly inflation rate.
The CSO arrived at the figure of 7.1 per cent GDP growth in 2016-17 from a nominal GDP growth rate of 11.9 per cent. The 2017-18 budget presented on February 1, 2017 predicted a nominal GDP growth of 11.9 per cent, lower than what the CSO predicted. Several experts say an 11 per cent nominal GDP growth for FY 2016-17 after all the deductions would translate to around 6.2 per cent GDP growth rate.