Holes in DeMo armour - Analysts feel fresh revision of 2015-16 GDP figure helped government paint a better picture

Our Special Correspondent

Mumbai, March 1: Prime Minister Narendra Modi could well choose to crow about the 7 per cent GDP growth in the third quarter of 2016-17 which, he believes, has blunted criticism about his demonetisation drive and its widely anticipated crippling impact on the economy. But analysts have started to focus attention on how the Central Statistics Office (CSO) "cooked" the numbers of the third quarter of 2015-16 to make the growth rate in the troubled, post-demonetisation third quarter look rosier than it actually is. The GDP estimate for the third quarter of 2015-16 was cut to Rs 28,30,760 crore -which was Rs 1,75,554 crore lower than the original estimate of Rs 28,52,339 crore put out in February last year. If the original GDP estimate for the relevant period in 2015-16 had been used in the calculations, the GDP growth in the third quarter of this fiscal would be just 6.2 per cent. The GDP figure for Q3 of 2015-16 was slightly revised in May last year, when the provisional estimates came out, to Rs 28,51,682 crore. If this figure was used, the GDP growth in the latest quarter would again remain at 6.2 per cent. The GDP growth rate in the third quarter of 2015-16 works out to 7.3 per cent with the original estimate and 7.2 per cent with the revised estimate of May 2016. That means the 6.2 per cent growth in the third quarter of this year is a full 1 percentage point lower than that in the same quarter of the previous year. This is the fact that the CSO's sleight of hand has tried to mask. "The steep downward revision of Q3 FY16 has, in turn, led to higher growth in Q3 FY17, thus masking the impact of demonetisation in the Q3 figures," Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, said in a research note put out today. Ghosh claims in his note that some of the numbers beneath the surface "signify the impact of demonetisation". "Growth rates in construction and finance sub-segments are at a 7-quarter low and at an all-time low, respectively, in the current base year. But what is intriguing is that growth rates of these segments show significant recovery in Q4. With cement despatches for January 2017 declining by a whopping 13 per cent, it is not clear how construction activity is reviving in Q4FY17," the note adds. There is another giveaway in the CSO statistics. The government's statisticians calculate GDP in two different ways: first on the production side and then on the expenditure side. On the production side, it first calculates the gross value added - a measure of the value created in the entire production cycle from raw material to finished product - and then adding net indirect taxes to obtain the GDP figure. On the expenditure side, it tots up expenditures in the private sector, the government sector, gross fixed capital formation, change in stocks, valuables, and exports minus imports to obtain the GDP figure. Usually, the GDP on the expenditure side is less than that on the production side because of data lags and the CSO covers up that gap by pushing the shortfall under a head called discrepancies. As the data streams improve, the discrepancy gets resolved, sometimes over several years. In the first quarter of 2016-17, the discrepancy on the expenditure side worked out to Rs 30,645 crore. This ballooned to Rs 45,378 crore in the second quarter. But the big surprise in the third quarter is that far from a shortfall, there was an excess of Rs 6,767 crore - which means GDP on the expenditure side was higher than that on the production side, an apparent absurdity that does not usually show up in the advance estimates. Ghosh contends that "the impact of valuables on the total estimates from the expenditure side tell the story of demonetisation". "After demonetisation, there was a steep fall in the international price of gold partly because the Indian demand momentarily subsided. This may have increased the percentage shares of private financial consumption expenditure in the total expenditure pie," he adds. The SBI's chief economic adviser believes it would be better to focus on GVA rather than the GDP figures in the third quarter to get the true picture. "GVA growth is estimated to grow at 6.7 per cent for FY17 vis-a-vis 7.8 per cent in FY16," the note adds. That ties in with what most experts are saying: growth in 2016-17 will be at least 1 percentage point lower than last year. Foreign brokerage Bank of America Merrill Lynch said the decision to ban over 85 per cent of the outstanding currency by abolishing Rs 500 and Rs 1,000 notes led to an impact of over 1 percentage point on growth. "Although December quarter (gross value added) growth, at 6.6 per cent, surprised on the upside (as against an estimate of 6 per cent), it is still lower than the 7.5 to 8 per cent projected by us in second half of FY17 before the demonetisation shock... demonetisation hit growth by over 1 per cent," it said.