Challenging the narrative

Speaking at an election rally in Uttar Pradesh on Wednesday, Prime Minister Narendra Modi wasted no time in decrying opponents of his government’s decision to demonetise Rs 500 and Rs 1,000 notes, a day after the Central Statistics Office said India’s GDP growth did not suffer as economists had predicted. Typical of the class narrative he has sought to build around demonetisation, Modi stated that the public knows the difference between “people at Harvard” and people’s “hard work”. Late on Tuesday, the government’s Central Statics Office pegged the current financial year’s third quarter (October to December) GDP growth rate at 7%, after factoring in demonetisation. “The numbers completely negate the kind of negative projections and speculations which were made about the impact of demonetisation,” a senior government official told journalists on Tuesday. The latest figures are indeed surprising considering the widespread disruption to economic activity caused by demonetisation. Many economists had contended that weak consumption would pour cold water on the country’s hopes of high growth. Trust the ruling government and their die-hard supporters in the media and academia to parade this figure in the following days. Who could blame them? As they’ll argue, the proof that demonetisation did not have a harmful impact on the economy lies in the CSO’S figures, despite other evidence to the contrary.

With any projection of data, however, there are many questions. As they say, the devil lies in the detail. The expenditure method is one way of measuring GDP. Under this approach, the various components, including private consumption expenditure, government consumption expenditure, investment, change in stocks, valuables and net exports (imports minus exports), are all added up. Private consumption expenditure forms a significant share of the GDP measured. A look at the fine print of the figures released by the CSO indicates that private consumption expenditure for the third quarter rose by 10.1%, in comparison to the same period in 2015. The government seemingly expects us to believe this growth in private consumption at a time when 86% of the currency in circulation was removed abruptly in a nation where 98% of all private transactions are carried out in cash. What’s more, many citizens were subject to arbitrary limits on ATM and bank withdrawals. Does the government want its citizens to believe that there was a spike in private consumption at a time when there was an acute scarcity of cash? In a recent blog post, a noted commentator on economic affairs, Vivek Kaul, presents another bit of evidence to dispute the private consumption figure. “Retail loans include loans given by banks to buy cars, two-wheelers, consumer durables, homes, credit card outstanding, etc. They are a good measure of how robust the private consumption scene is in the country. The growth in retail loans between October and December 2016 was almost flat at 0.5%. This isn’t surprising given that most of the retail banking staff of banks was busy dealing with all the cash making it back to the banks because of demonetisation,” he writes. Some experts believe that the GDP numbers would not capture the immense pain caused by the government’s ill-fated move. They contend that CSO has limited capability to measure India’s massive informal economy. One cannot hide from the fact that thousands in the informal sector lost their jobs. In fact, industrial growth in eight core sectors slowed to a five-month low of 3.4% in January mainly due to contraction in output of refinery products, fertiliser and cement, compared to 5.7% growth in the same month last year. Real estate, construction and financial services have also suffered a significant slowdown in this quarter. Despite these significant constraints, our government would like the people to believe that the economy is back to normal. Roshan Kishore, an analyst at Mint, presents a plausible explanation for the government’s growth figures: “Speaking in Parliament on the demonetisation issue, Prime Minister Narendra Modi had said that the government waited for the festive season to get over before announcing demonetisation in November. This seems to be a strategic decision. Latest GDP numbers show that the year-on-year growth in private consumption expenditure is at an all-time high since September 2012. This would have seemed natural given a normal monsoon after two successive drought years and the festival season effect. Did tailwinds from these two factors more than take care of demonetisation-triggered headwinds?” Private consumption in India hits the high notes during the winter festival season and drops post-diwali. If this is indeed the case, individual experts contend that a better understanding of demonetisation’s adverse effect on economic activity will be available only when the growth figures for the last quarter come out.