Q4 GROWTH LIKELY AT 6% OR LOWER: PRONAB SEN

To questions on the gross domestic product (GDP) data issued by the Central Statistics Office (CSO) on Tuesday, the government’s former chief statistician, PRONAB SEN, talks to Indivjal Dhasmana on how to interpret it. Edited excerpts:

Critics had earlier doubted the new methodology of GDP calculation and this increased after the release of GDP data for the third (October-December) quarter and the second Advance Estimates for 2016-17 that show no major impact of demonetisation on the economy. Do you agree with them?

You have to understand what the new methodology does. It uses basically balance sheet data to calculate GVA (gross value added). In the quarterly data, you use mostly quarterly filings by listed entities. The question you have to ask is what goes in the financial statements. As far as the company is concerned, what is shown as total sales is not necessarily what is bought by the consumer. If I have dispatched cars to my dealers, I can treat his as sold. Even if these are unsold by dealers, this will increase my sales figures. There is nothing intrinsically wrong in that.

Has this ‘channel stuffing’ increased in the demonetisation period?

Yes, it has.

Whydoyousayso?

Most manufacturers don’t have black (undisclosed) money. Most black money is at channels (retailers, wholesalers). What was essentially happening was that manufacturers were selling their supplies to trade channels, taking the old cash and paying off the excise. Basically, what you did was you took away the black money component from the trade channel and showed up excise payments to manufacturers. This is what exactly happened.

So, this meant excise duty payment went up in the third quarter and so also GDP (seven per cent rise) despite a lower GVA (six per cent rise)?

Yes, particularly in the GDP from manufacturing. This would not happen so much in services.

What should a reviewer of the economy look at GDP growth or GVA growth?

Both. Ultimately, what is paid to the government is part of income. That is what the data is saying - GDP has gone up faster than GVA because indirect taxes have gone up. If you are doing channel stuffing, GDP will go faster than GVA.

If sales at consumer levels have not increased, why do the CSO figures show a 10 per cent increase in private final consumption expenditure in the third quarter, double the five per cent in the second quarter?

It does not mean anything. In the quarterly estimate, you should not take the expenditure side too seriously. You do not have any direct measure of expenditure. You are essentially extrapolating from the production side. Production of consumer goods is used to project the consumption side.

You had earlier told us in an interview that the fourth quarter of the current financial year would be worse than the third quarter. But, the Advance Estimates for 2016-17 don’t show it.

You have the empirical relationship between quarters in a seasonal way. You only apply that. You would say if three quarters have behaved in a particular way, the fourth quarter would also do so. All of that assumes continuity. But, demonetisation disturbed the continuity. The past might not be an indicator of the fourth quarter.

Do you still believe Q4 would be worse than Q3?

Yes.

As we have three quarters of actual data, what is your estimate of GDP growth for the fourth quarter and for all of 2016-17?

I expect fourth quarter GDP growth to be sharply down. I would imagine it would shave off at least one percentage point, if not more, as compared to the third quarter.

You mean GDP growth would be six per cent in the fourth quarter?

If not lower.

For the entire financial year?

About 6.6 per cent, one percentage lower than the original expectation.