Ever since the Central Statistics Office (CSO), put out advance estimates for GDP growth for 2016-17, economists have been digging holes in its forecast, as they do not take into account the impact of the slowdown in the economy post demonetisation.

The Survey, has taken a different approach. Starting with what it modishly calls the ‘counterfactual’— what real GDP growth would have been in the absence of demonetisation — the economic survey then assumes the possible impact on growth owing to demonetisation. Working with a ‘counterfactual’ or baseline real GDP growth figure of 7 per cent in 2016-17, it assigns a 25-50 basis points reduction in real GDP growth on account of demonetisation. This implies a possible 6.5-6.75 per cent growth in real GDP for 2016-17.

While the economic survey growth numbers are more credible than that put out by the CSO, the many ifs and buts in its assumption, make it difficult to gauge the growth in 2017-18; economic survey setting a wide range of 6.75-7.5 per cent growth in real GDP for the next fiscal only highlights the extent of uncertainty in the economic environment.

Why an overestimate? The CSO’s estimate of a 7.1 per cent growth for 2016-17, was no doubt grossly overestimated.

To be fair, there is a dearth of information to ascertain the growth in most non-agriculture segments. The new GDP incorporates more comprehensive data on corporate activity and annual accounts of companies filed with the Ministry of Corporate Affairs — MCA21 is used. Including around 5 lakh companies, the data will get updated only post the third quarter results.

The CSO estimates agriculture to grow by 4.1 per cent in 2016-17. These figures may not see much revision. According to the first advance estimate for 2016-17, total production of kharif foodgrains is estimated at 135.03 million tonnes, up last year’s production of 124.01 million tonnes.

But some of other indicators suggest that growth numbers could be weaker in the second half of the fiscal.

Construction is expected to grow at 2.9 per cent, in the current fiscal according to CSO. This implies 3.4 per cent in the second half of this fiscal.

But demonetisation can depress growth in this segment. The services are seen to witness similar growth as last fiscal.

But services PMI contracted for the second month in a row in December.

The CSO has pegged manufacturing to grow by 7.4 per cent in 2016-17. Though down from the 9.3 per cent growth in 2015-16, the figure still carries a downside risk. Manufacturing IIP shrunk by 1 per cent during the April-Oct period.

The new GDP uses annual accounts of companies filed with the Ministry of Corporate Affairs — MCA21. IIP data on the other hand is based on the Annual Survey of Industries (ASI), which can explain the divergence to some extent.

But even so, post demonetisation, the manufacturing performance has weakened, which will impact growth in the second half. The headline seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ IndexTM (PMITM) recorded below the crucial 50.0 threshold for the first time in 2016 during December.

The MCA21 database includes companies from the unlisted and informal sectors, impacted the most by demonetisation. Hence, the existing growth estimates by the CSO can undergo sharp revisions in coming months. The survey has pegged down growth in real GDP to a more realistic range of 6.5-6.75 per cent for 2016-17.

Risks to fiscal The Survey assumes a baseline growth of 11.25 per cent for 2016-17 in nominal GDP, lower than the 11.9 per cent estimated by CSO.

To this, it assumes a 25 basis points to 1 percentage point reduction in growth, implying 10-11 per cent growth in nominal GDP.

A lower base can upset the fiscal deficit to GDP ratio. All eyes are now on the Budget to see, how the Centre will balance its fisc equation amidst uncertainty in GDP growth.

Related Topics
comment COMMENT NOW