GDP Surprise ; Why GDP data does not show the demonetization effect (GS-3

Home » GDP Surprise ; Why GDP data does not show the demonetization effect (GS-3

GDP Surprise ; Why GDP data does not show the demonetization effect (GS-3

GDP Surprise ; Why GDP data does not show the demonetization effect (GS-3 -GDP Surprise ; Why GDP data does not show the demonetization effect

GDP Surprise ; Why GDP data does not show the demonetization effect (GS-3

Why in news?
The estimates put out by the CSO showed that the Indian economy expanded at a rate of 7%, year-on-year, in the third quarter of the current fiscal, and is expected to grow by 7.1% for the full year.
Why the rate has surprised the analysts?
  • The numbers put out by the CSO suggest that the currency swap didn’t have a significant impact on economic activity.
  • There could be several reasons why GDP growth has surprised on the upside.
  • It is possible that the informal sector, which is largely cash dependent, would have been affected the most, but the impact has not been captured in the quarterly data.
  • The fact that the quarterly GDP statistics rely on organized sector data as a proxy for the unorganized sector may be one of the reasons for the divergence.
  • Another reason that could have played an important role is, contrary to popular public perception, that the entire currency swapping exercise was managed well in terms of timing.
  • It was announced after the festive season and thus did not affect consumption demand.
  • On its part, the government also bumped up its own expenditure significantly during this quarter.
  • Growth has also been supported by a sharp recovery in the agriculture sector after two years of drought.
  • However, some commentators say that perhaps the data is being deliberately manipulated.

According to official statistics, demonetisation hardly dented economic momentum. India’s GDP growth slowed only marginally to 7% y-o-y in Q4 from 7.4% in Q3, above expectations (6%). Private consumption, fixed investment and industrial output growth all accelerated in Q4, with only the services sector witnessing a slowdown.

This does not add up. High frequency real activity data released since demonetisation suggest that consumption and services were hit after demonetisation because they are more cash-intensive.

What worries the policymakers?

  • In the absence of revival in investment demand, economic growth continues to remain dependent on consumption expenditure.
  • Even though gross fixed capital formation went up in the third quarter, its share in GDP has slipped below 30%.
  • Stressed assets in the banking system are affecting investments to a large extent, with no real solution in sight.
  • Analysts are busy interpreting the exact impact of the currency swap. Things will become clearer when the next estimate for the year and data for the fourth quarter is released in May.

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