Mixed verdict

At first glance, it does come as a pleasant surprise that the third quarter growth in gross domestic product was an impressive 7 per cent, despite the fact that 86 per cent of the currency in circulation had been withdrawn during this period. A BusinessLine analysis (February 12) pointed out, after analysing the results of 1,700 companies, that they had reported a year-on-year sales growth of 9.1 per cent in the October-December 2016 period, against a similar year-on-year growth of 5 per cent in the preceding quarter. Profits (in y-o-y terms) in the December quarter were up nearly 30 per cent, against 13.6 per cent in the September quarter. However, it was evident even then that consumer-oriented sectors (automobiles, FMCGs, media, entertainment, paints and retail), apart from real estate, were not part of this party. Two-wheelers, fertiliser and tractor sales were impacted, an indication of the impact of the note ban on rural India. Perhaps pointing to an mixed impact, the gross value added (which is GDP without taking net indirect taxes, or indirect taxes minus subsidies) points to a Q3 growth of 6.6 per cent, against 7 per cent in Q3 of 2015-16, and 6.7 per cent in Q2 of this year. The chief statistician explains that the nearly half percentage point difference between the growth of the GVA and the GDP is due to “an improved estimate in net indirect taxes”.

In other words, a combination of a spurt in taxes and a reduction in subsidies has brought about an improved GDP figure for Q3 — which is not exactly the same as saying, as the economic affairs secretary did on Tuesday, that the GDP numbers negated “the negative speculation on demonetisation”. Indirect tax revenues are likely to have increased on the back of more transactions coming under the tax net, and higher fuel prices. The 10 per cent rise in Q3 private consumption (from ₹16.1 lakh crore in Q3 of 2015-16 to ₹17.7 lakh crore in Q3 of this fiscal) also seems counter-intuitive. Perhaps, the CSO could shed some light here.

A clearer picture would emerge perhaps in May when data on the informal sector, which the new ministry of corporate affairs database seeks to represent, is out. The CSO has, to its credit, been upfront about saying that “the sector-wise estimates are obtained by extrapolation of indicators like IIP for the first nine months of the financial year and financial performance of listed companies...” Given the numerous revisions that occur in the growth estimates, it is advisable to take the initial numbers with a pinch of salt. The economic impact of demonetisation on rural India and MSMEs, both highly cash-driven, remains a fuzzy area. In the event of a good monsoon, the economy is likely to return to its earlier trajectory towards the latter half of the calendar year. But the Centre, instead of being lulled into a sense of complacency, should keep a watch on events on the ground.