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Solving the GDP Puzzle.

Summary: The third-quarter estimates of gross domestic product (GDP) growth announced by the Central Statistics Office (CSO) have surprised many experts. The CSO said it expected India's GDP to grow 7 per cent in October-December 2016, discounting fears of a major slowdown as a result of demonetisation. For 2016/17, the CSO has projected 7.1 per cent GDP growth. In effect, the estimates suggest that the negative impact of demonetisation will be insignificant. We get four leading economists to solve the mystery of these numbers.

D.K. Joshi, Senior Director and Chief Economist, CRISIL

This is an advance estimate and advance estimates are subject to revisions - usually two-three revisions. After this, we will see revised estimates and then final estimates, as more information about the year is available. This is based on the first set of numbers.

Informal/unorganised sectors have not been captured well in the first estimate. So, an over-estimation is possible to some extent, as the data have not captured the part that was possibly impacted more by demonetisation. So, my sense is that we can see the estimates getting revised downwards. However, I dont see a substantial downward revision. For example, the consensus was that the third-quarter number will come down to 6 per cent, but advanced estimates show it at 7 per cent.

The second message you can derive from this number is that growth has been supported largely by government expenditure.

The third is that the impact of demonetisation has not been long lasting. The dent was not that significant, at least according to this set of data.

What kind of revision do you expect?

In this environment, it is difficult to predict. Our outlook for this year is 6.9 per cent and not 7.1 per cent. The Economic Survey pegs it at 6.6 per cent. So, there are various estimates, but one thing is clear - demonetisation has not been catastrophic as expected.

Pronab Sen, Economist and Former Chief Statistician of India

The advance numbers are completely off-the-mark, but on expected lines. I have said this earlier also - that quarterly GDP numbers are based on organised sector data and do not reflect the informal sector, which has been impacted the most by demonetisation. The revised data may be more accurate but come later.

The informal sector is captured on the assumption that it reflects the organised sector. However, the size of organised and unorganised sectors in a particular industry may differ. In certain sectors, the organised space is larger than the unorganised space and vice versa, but the growth rate applied in both is the same. There is no direct measure only for the informal sector, except the employment data. The only real measure of the informal sector is the CSSO data, which comes after three-four years.

N.R. Bhanumurthy, Professor, National Institute of Public Finance and Policy

It is a pleasant surprise as many government economists themselves were expecting demonetisation to have a bigger impact than what has been projected by the CSO. If you ask me, even in the past (pre-demonetistion days), I have never taken quarterly estimates seriously. This is because large components of GDP estimates are projections based on the previous quarter (the benchmark indicator method followed by the CSO compiles estimates obtained by extrapolation of indicators and not on the basis of actual data). So, I give less weight to quarterly estimates. We all know that there are companies that have taken a demand-side hit after demonetisation, but it seems that the advance estimate does not capture the impact. So, we need to wait for GDP growth numbers for the whole year. One expected positive fallout of demonetisation was the transition of the informal economy into the formal economy. If that was the case, trade and finance, the two sectors with a large informal presence, should have performed better than the previous year as GDP numbers capture the performance of the formal economy to a greater extent.

Mukesh Butani, Non-Executive Chairman, BMR Advisors

Regarding the estimates released by the CSO, since the most aggressive estimates were also not accounting for such an outcome, they have come as a surprise. It is realistic to assume that there will be an upward or downward revision of these numbers soon. It could be anybody's guess to sit down and speculate on the veracity of these numbers now. So, you just go with the numbers given by the official statistical organisation. To say that these figures look aggressive in the light of demonetisation will be speculative. On what basis are you making such assumptions? Lets wait for estimates beyond these to see if the numbers hold.

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Publication:Business Today
Date:Mar 26, 2017
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