Good analysis that addresses most of the criticism directed towards CSO for GDP numbers...
1) GVA growth is in line with forecasts, it is surge in indirect taxes that provided part of the "unexpected" GDP growth.
While GVA growth is pretty close to private forecasts, what lifted the GDP is the strong 12.3% surge in indirect taxes that the CSO estimates for this fiscal. This is a plausible number, given that the Centre’s indirect tax collections already surged by 25% in April-December 2016, powered by higher excise duty on fuel and service tax.
2) Why collapse in sales of certain goods such as two-wheelers may not necessarily indicate all-round collapse? And what about anaemic bank loan growth?
Commentators cite some key indicators to ‘prove’ that economic activity shrank in the note ban months. For instance, two-wheeler sales collapsed by 22% year-on-year in December, banks reported anaemic loan growth at 5%, cement despatches fell by 9% and realtors saw a 40% dip in home sales.
But given that the economy is made up of literally hundreds of products and sectors, it is well within the realm of possibility that the economy did well even while these indicators slowed. For instance, for the same December month, steel output grew by 15%, power generation surged by 6% and refinery output expanded 6.4%. If bank credit slumped, companies doubled their borrowings from the bond market.
3) Was impact on GVA understimated? Probably not.
But making up for these was the 6% rebound in agriculture (2.2% shrinkage last year), 6.8% increase in electricity, gas and water supply and a bumper 11.9% hike in ‘public administration, defence and other services’ which lifted the GVA.
December quarter results from listed companies also provide independent confirmation that the big picture wasn’t much dented by the note ban. A Business Line analysis of over 1,700 listed companies showed that they just reported their best quarterly performance in three years, with sales growing over 9% and profits expanding 20%.
Commentary from listed firms suggests that urban discretionary purchases bounced back quickly as consumers switched to digital payments. Commodity industries, helped by global price rebound, did very well this quarter. In some sectors, business shifted from the unorganised to organised players due to digital payments.
Analysts also suspect that, in some cases, companies mopped up demonetised notes from their distribution channels and pumped them with inventory instead. (This would show up as ‘sales’ in the company’s books and as ‘output’ in GDP estimates)
4) what about impact on informal sector being underestimated?
Owing to such guesswork, it is quite likely that the quarterly GVA estimate, which mainly uses data from the formal sector, painted a rosier picture of growth than the ground reality. But then, if the CSO — with its access to multiple data sources — has no way to estimate the quarterly performance of the informal sector, neither does anyone else.
As long as the CSO consistently follows the same method for measuring the informal sector and publicly discloses it, this is the only estimate we have to gauge economic activity. Both the methodology for estimating informal sector performance and GDP revisions are well-documented and disclosed on the Ministry of Statistics and Programme Implementation website.
More accurate estimates of what really transpired in the Indian economy post-demonetisation will be available when the CSO publishes its first revised GDP estimates, with more ground-level data, in January 2018.
Until then, critics must follow Keynes’s tenet — when facts change, it is best to change your mind.