GDP expands at 7.1% in FY17, but slows to 6.1% in Q4 as demonetisation bites

Gaurav Choudhury & Shreya Nandi

The Indian economy grew at 7.1 percent in 2016-17, the government said in new estimates on Wednesday, identical to the expansion projected in February, but slower than the previous year’s 8 percent growth.

A 6.1 percent growth in January-March quarter, however, indicated that the economy is still smarting under the demonetisation shock that the sudden flush out of high-value notes and restricted cash access had caused on household spending and corporate investment.

India also lost its status of fastest growing major economy, slipping sharply behind China’s 6.9 percent growth in January-March 2017 quarter.

Private Final Consumption Expenditure (PFCE), a metric to measure household spending, fell to 58.7 percent of GDP (in current prices) during January-March 2017 from 61.6 percent in the previous quarter and 59.1 percent in the fourth quarter of 2015-16.

Gross Fixed Capital Formation (GFCF), a guide for measuring investment activity, also fell to 25.5 percent of GDP (current prices) during January-March 2017, from 27 percent in the previous quarter and 28.5 percent in the fourth quarter of the previous year.

Chief Statistician of India TCA Anant, however, cautioned against reading too much about demonetisation’s impact from the GDP data.

“Impact of policies such as demonetisation from GDP data can be termed as a post-hoc analysis,” Anant said. “Impact analysis of policy is a complex analysis in econometrics. It is not a simple before and after argument.”

The new gross domestic product (GDP) estimates factors in a rebased factory output and wholesale price inflation (WPI) data that shows weaker price rise and stronger manufacturing activity compared to the previous estimates.

Earlier this month the government released new sets of index of industrial production (IIP) and WPI data changing the base year to 2011-12 from 2004-05. It also added new categories of goods and changed weights to bring the two indices more in tune with current consumption trends.

According to GDP data released on Wednesday, which uses the rebased IIP, the gross value added (GVA) in the manufacturing sector grew 7.9 percent in 2016-17, higher than 7.7 percent in the old series, but slower than the previous year’s 10.8 percent.

WPI inflation is used to arrive at the real growth series from nominal data. The new WPI series is consistently weaker than the older series, pointing to small deflator values. Under the new series, WPI rose 1.7 percent in 2016-17 compared to 3.7 percent in the previous series.

GVA VS GDP

The central statistics office (CSO) has estimated a slower growth for GVA— 6.6 percent in in 2016-17 — suggesting that expansion is slower than what the headline GDP numbers suggest.

GVA, which is GDP minus taxes, serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the economy.

In the second advance estimates released in February, the CSO had estimated that growth in GVA, which is GDP minus net taxes, will slow down to 6.7 percent in 2016-17. On Wednesday, the provisional estimates showed that GVA grew 6.6 percent in 2016-17, 1.3 percentage points slower than the previous year’s 7.9 percent.

The effect of the currency recall in November 2016 and the resultant slowdown in consumption and investment may well be hiding in the slower 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 CSO also revised the “real” or inflation-adjusted GDP growth figures from 2013-14 onwards because of the new IIP series. According to the new estimates, India’s real GDP grew 6.4 percent, 7.5 percent and 8 percent in 2013-14, 2014-15 and 2015-16 respectively from 6.5 percent, 7.2 percent and 7.9 percent.

WATCH | How India's Economy Measured

LIMITED IMPACT OF NEW IIP

The new GDP data showed limited impact of a rebased IIP, as the estimates for the quasi corporate and unorganised sector appear to have undergone revisions, while the bulk of the manufacturing sector have remained unaffected.

The manufacturing sector grew 5.3 percent in January-March, compared to 12.7 percent growth in the same quarter of the previous year. The estimates also marginally revised the third quarter (October-December) manufacturing sector growth to 8.3 percent from the earlier projection’s 8.2 percent.

The new data has retained the earlier manufacturing growth estimates at 6.9 percent and 9.0 percent for July-September and April-June 2016 respectively.

While IIP remains a crucial component in measuring GDP, in the new GDP calculation methodology, industrial activity measured by the IIP accounts for only about 25 percent of all output.

Earlier, organised industrial activity was measured purely by IIP. It used to get updated two years later based on data coming in from the Annual Survey of Industries (ASI).

This has limitations, as ASI only captures goods’ value at the factory gate, and that too only of firms registered under the Factories Act.

Now, the corporate affairs ministry’s MCA21, a comprehensive compendium of balance sheet data of about 5,00,000 firms, is used, along with corporate income data of all stock market listed companies. This captures value added by activities even such as marketing, which can be significant for large consumer goods companies.

“The impact of revision of IIP and WPI on GDP is somewhat muted,” Anant said.

AGRICULTURE

The farm sector, however, has rebounded smartly aided by plentiful rains last summer. It grew 4.9 percent in 2016-17 from 0.7 percent last year and 5.2 percent in January-March compared to 1.5 percent in the fourth quarter of 2015-16

The strong fourth quarter growth also, perhaps mirrors demonetisation’s limited impact on the winter-sown Rabi crop.

The GVA estimates of this sector have been compiled using the third advance estimates of production of food grains for 2016-17, which show that food grain production will touch 273.38 million tonnes in 2016-17 agricultural year, higher than 251.57 million tonnes produced during 2015-16.

According to the Indian Meteorological Department (IMD) the June-September monsoon is likely to be normal this year, a forecast that will be cheered by millions of farmers and the government alike.

Monsoon has already hit Kerala on May 30, two days ahead of its normal arrival date, triggering hopes of a bountiful summer harvest this year. For good farm output, the rains need to be not just plentiful overall, but evenly spread. Inadequate rains can trigger rural distress, which can force government to increase spending to offset losses.