India’s puzzlingly good GDP report: Read with caution!

March 5, 2017

NEW DELHI - India’s GDP/ Gross Value Added (GVA) report for Q3 of FY16-17(i.e. Q4 2016) and the second advance estimates of real GDP growth for the full financial year of 16-17 pointed to growth moderation, due to the cash crunch amid the unexpected and unprecedented demonetisation scheme in early November, but all came far above market expectations.

Real GDP growth on a year-on-year basis moderated to 7.0% in Q3 of FY16-17, the slowest pace in seven quarters, from 7.4% in the previous quarter. Yet, this came far above market expectations (consensus: 6.1%).

· Real GVA growth, a better measure of economic activity from the supply side perspective, rose 6.6% YoY in Q3 of FY16-17, little change from an increase of 6.7% in the previous quarter. This also exceeded market expectations (consensus: 6.0%).

For the full financial year of 16-17 (ending March), the second advance estimates of real GDP growth stood at 7.1% (consensus: 6.8%; previous year: 7.9%), implying a growth projection of 6.9% YoY in Q4 of FY16-17.

Global credit insurer Coface, warns, however, that caution is required, when reading whaat it terms “this puzzlingly good GDP/GVA report for FY16-17”.  It says the figures will probably be revised downwards when more data become available.

Coface says the GDP/GVA report suggested that the Indian economy weathered remarkably well the adverse impact of the unexpected and unprecedented demonetization scheme announced on November 8, 2016, with the withdrawal of all INR 500 and INR 1,000 notes representing more than 86% of the money supply in India, where most transactions are still carried out in cash.

“Nevertheless, we reckon that the official GDP/GVA figures have yet to capture the business challenges that small and medium enterprises faced, especially for those sectors using cash as major transactions, as the GDP/GVA estimation reflected mainly the performance of large enterprises, given the use of industrial production and corporate earnings as proxy.

“At the same time, commodity-related corporate earnings were boosted in the light of higher commodity prices, somewhat masking the difficulties that non-commodity corporates faced.

“This in part helped explain why the growth in the manufacturing sector surprisingly quickened to 8.3% YoY in Q3 of FY16-17 from 6.9% in the previous quarter.

“Besides, the strong private consumption growth of 10.1% YoY in Q3 of FY16-17 (Q2: 5.1%) and the pick-up in investment of 3.5% in Q3 of FY16-17 (Q2: -5.3%), the first time in a year, appeared to be puzzling, as the demonetisation created huge shocks and inconvenience to Indian consumers and kept domestic and foreign corporates cautious about business expansion.

“One possible reason behind these puzzles could be that the cash-intensive informal sector that was the key victim of the demonetisation scheme used not to be adequately captured under the GDP/GVA estimation would from this quarter onwards be added amid the wider use of internet based payment system.”

But Coface says it does acknowledge that the impact of demonetisation on growth might be smaller than expected, given the trust among corporates, business partners and customers in this time of liquidity squeeze.

On the ground reality would probably be worse than what the GDP/GVA report suggested, partly reflecting on already worrying banks’ non-performing assets which the Reserve Bank of India (RBI) has been implement banks’ reforms to address this,” Coface adds. (ATI).