The macroeconomic numbers released today, while reassures that India’s growth story is intact, but also baffle many experts as the indicators don’t seem to have encompassed the extent of disruption caused by the surprise cash ban on November 8, 2016.
In a panel discussion on CNBC-TV18, Pronab Sen, Former Chief Statistician of India said that formal sector data is used as a proxy to estimate the informal sector data, hence even though the informal sector was hit harder due to demonetisation the numbers don’t seem to reflect it.
He further expects Q4 numbers to be sharply down as more reliable data covering the impact of demonetisation will be available.
In the same interview, Economic Affairs Secretary Shaktikanta Das said that the economy is back on track and the process of demonetisation is near completion.
Soumya Kanti Ghosh Chief Economic Advisor SBI said that some numbers beneath the surface show the impact of demonetisation.
Madan Sabnavis, Chief Economist, CARE Ratings and DK Joshi, Chief Economist, CRISIL also shared their views in the discussion.
Below is the transcript of the discussion.
Q: This is surprising, the most surprising part for me is the revision of last year’s numbers. We already had them, what we now have is the quarterly breakup. The Gross domestic product (GDP) number for the four quarters of FY16 7.8 percent, 8.4 percent, 6.9 percent and again 8.4 percent. This is surprising that only Q3 of last year has gone down. Should we find this funny or is this par for the course?
Sen: I suspect that would be driven essentially by agriculture because you would have had the final estimate for the kharif which was very bad last year. So, that is alright, I don’t think that is particularly a worry.
Q: What have you got to say about the 7 percent Gross domestic product (GDP)for the quarter gone by itself, boosted only by public administration and agriculture but even then 7 percent?
Sen: Let us be very clear, what are the figures telling? What it is saying is there is a massive difference between the GDP and the Gross value added (GVA) estimate. What that suggests is exactly what we have been talking about in the past as well that there has been a lot of channel stuffing, a lot of pre-payment of taxes, so that is showing up.
If you look at the GVA that hasn’t grown very much -6.6 percent. However even that needs to be taken with a pinch of salt because manufacturing has been shown to have risen fairly sharply and I suspect all of that is really channel stuffing. It means the producer offloads his inventories on to the dealers. So, it is shown as production and the excise is paid out on that.
Q: In that case at least private final consumption expenditure should not look so good, that is as high as 10 percent in Q3?
Sen: Private consumption expenditure is always calculated as a residue. So, you have your estimates on income, then you knock off what you measure reasonably accurately which is investment and public expenditure and what is left is essentially consumption.
Q: In that case I should also take issue with the gross fixed capital formation, up by 3.5 percent for Q3?
Sen: No, that may well be true. Fixed capital formation is based upon the consumption of steel and cement. I don’t know whether there was channel stuffing in those two commodities.
Q: You said that probably Q3 numbers for manufacturing looked very good at 8.3 percent because there must have been channel stuffing. Most of the goods supplied and kept at the inventory level. Do you think therefore that we should be prepared for a lower Q4 number, what would be you best estimate GDP or GVA?
Sen: What they have at the moment are hard estimates of Q3 and Q4 which is the full year estimate is again an extrapolation. It is extrapolation using the Q3 numbers. So, it follows exactly the same seasonality that has prevailed in the past.
Q: I mean on May 31 when we get Q4 numbers should we be prepared for a downward number?
Sen: When you get Q4 numbers, I suspect they will be sharply down. Even though we are talking still about essentially corporate data, organised sector data which is not going to capture the full effects or even the larger part of the effects of demonetisation. However I think you will see much lower figures for Q4.
Q: I was given to understand by the chief economic advisor when he spoke after the economic survey that we use the value added formula of the formal sector for the informal sector because we don’t know the valued added formula just yet for the informal sector. Is it that the informal sector has been overestimated and probably in January of 2018 when the final numbers come it may not look as good as 7 percent GDP growth?
Sen: Yes in quarterly numbers we simply have no information on the informal sector. So, we use the formal sector data as a proxy and the assumption is that the two will move together. I think now with demonetisation the two have actually not moved together. The informal sector has been hit much harder. So, we are overstating it but we won’t know until at least next year.
Q: I will tell you why there is some discomfort with the numbers announced if you derive the private final consumption numbers they come in at 10 percent growth. Manufacturing according to the CSO in the third quarter has risen by 8.3 percent. Why these numbers are uncomfortable is because when you look at Hindustan Unilever numbers showed a 7 percent fall in volume not prices, Asian Paints 4 percent fall in volumes. All the two-wheelers showed 15-20 percent fall in volumes — so they are not reconciling with the micros?
Das: Well, if you recall you will remember that all along when Q2 figures were released and when there were remarks that the Q3 will be affected because of demonetisation. Our response was that let us not go by anecdotal evidence — let us wait for hard facts — let us wait for actual statistics. I stick to the same position now — now we have the actual statistics before us so far as Q3 is concerned and on that basis the projection for the whole year. Let us go by actual statistics.
Now to make a speculation at this stage that two-wheeler manufacturing sectors did do well during the Q3, but overall manufacturing has done well in Q3 8.3 percent is a very robust growth so far as manufacturing is concerned and also we cannot presume at this stage that the manufacturers were going on manufacturing and pushing the products into the supply chain.
Now nobody would like to block working capital and divert capacities just for stuffing the supply channels – so all that I am saying is that the earlier negative projections which were made regard to the adverse impact if any of demonetisation – I think they were all overestimation and the economy is very much back on the wheels and the process of remonetisation is near complete.
If you recall, let me also mentioned that today morning the Organisation for Economic Co-operation and Development (OECD) while releasing their economic survey for India – the secretary general has himself gone on record by saying that they consider India as a star performer so far as the reforms are concerned. Now the reform track record of the government is very robust and it will continue to be so.
Q: Cement output according to the core sector is a contraction in January. It was a contraction in December. Likewise, all the companies also indicated the same to us, land registrations have fallen. One can see there is anecdotal evidence of lower activity?
Das: Now let mentioned you have referred one to the core sector data and also you have referred to real estate activity. Now so far as core sector data is concerned as you are aware the sample size of that is quite a limited. It is based on the figures of certain numbers of companies – so therefore now that we have the overall GDP numbers – the core sector data is obviously subsumed into that number and so far as the real estate sector is concerned – let us remember that the government has now enacted the Real Estate Regulatory Authority that Act is now enacted – so entire real estate sector is now undergoing a process of structural reform, a process of structural readjustment and correction if I may say so. There is a greater amount of consumer protection.
Q: You are attributing lower activity to that?
Das: There could have been a slowdown in the real estate activity because the sector is undergoing a structural correction.