India’s economic growth of 7% during October-December has sparked a debate on how output grew so fast at a time when the country was facing its biggest-ever cash crunch after Prime Minister Narendra Modi announced on November 8 the demonetisation exercise, which weeded out 86% of the currency notes in circulation.
Economists and experts cite at least five reasons why the government data of a robust economic growth looks doubtful in the backdrop of Modi’s decision to scrap old Rs 500 and Rs 1,000 notes held by 1.2 billion people.
1. How did consumption rise amid cash crunch?
CSO data indicates the pace of private consumption doubled to 10.1% in 3Q, which appears absurd for a country that depends heavily on cash for household expenses.
“We recognise that a combination of good monsoon, pay commission and festival demand had been supportive for consumption demand, but the sharp decline in our rural demand indicates that this data point could be prone to revision in subsequent releases,” Citi economists Samiran Chakraborty and Anurag Jha wrote in a note.
Goldman Sachs economists wrote in a note that the robust private consumption growth in October-December comes as a big surprise, given sales volume of major consumer companies, two wheeler sales and others declined sharply in the quarter. Net exports contributed negatively to GDP growth after the positive contribution for the prior two consecutive quarters.
While the impact of demonetisation was only seen in the second half of December quarter, there could be a “potential distortions” due to festive season demand along with the use of old notes.
2. Investment up but cement, truck sales weak?
Following three consecutive quarters of contraction, investment in plant and machinery as measured by gross fixed capital formation rebounded 3.5% in the period of demonetisation.
Weaker growth in commercial vehicles sales, cement production and real estate sector suggests that investment was hit.
3. Shifting goal posts to look Q3 better?
The robust GDP data could also be attributed to a statistical illusion. The CSO revised down the Q3 estimates of 2015-16 by 0.3 percentage point to 6.9% from 7.2% earlier, which aided in improvement in Q3 of 2016-17.
The sharp revision in Q3 estimate raises eyebrows as CSO revised up Q1 and Q2 estimates of 2015-16.
“The steep downward revision of Q3 of 2015-16 has in turn led to higher growth in Q3 2016-17, thus masking the impact of demonetisation in the Q3 figures,” said Soumya Kanti Ghosh, chief economic adviser at the State Bank of India.
“The numbers seems too good to be true,” he opined in a note.
4. Pain of SME, informal sector don’t show up
The growth in the unorganised sector, which represents 21.5% of the manufacturing sector, is estimated using proxy indicators like IIP and may undergo significant downward revision, Citi said.
“The GDP numbers do not adequately capture the output of the informal sector. So it (Q3 GDP growth) appears to be on the higher side. There is a strong likelihood that the numbers may be revised down later,” said Rupa Rege Nitsure, the group chief economist at L&T Finance Holdings.
5. Mobile wallets, e-commerce came to the rescue?
The growth in alternate channels in payments like mobile wallets boosted sales during note ban, said Madan Sabnavis, chief economist of Care Ratings.
While Amazon, FlipKart and others witnessed a decline in sales through cash on delivery immediately after the note ban, there was a rise in digital transactions through credit cards, debit cards and mobile wallets.
The use of digital mode rose as much as 1,000% as cash-starved consumers used e-wallets like as Paytm, Freecharge, Mobikwik, and Citrus Pay to pay for even vegetables and groceries.
Prime Minister Narendra Modi and his team also promoted the United Payments Interface and Bharat Interface for Money (BHIM) app to ease the pain of demonetisation of consumers and traders.