‘Govt’s GDP growth forecast overestimated’

Primary reason for the overestimate is the absence of sufficient information for the third quarter

DEMONETISATION IMPACT

RATING AGENCIES have said the GDP growth projection released by the government on Friday is overestimated “given the impact of demonetisation on actual activity from midnovember 2016 onward”. ICRA and Care Ratings have forecast 6.8 per cent growth for 2016-17 and Crisil 6.9 per cent while the government has projected 7.1 per cent growth.

The primary reason for the government’s overestimate is the absence of sufficient information for the third quarter when the economy slowed due to demonetisation. There are only a handful of indicators for the fiscal’s third quarter that the government could have looked at, to arrive at the full year forecast now, such as agriculture production and sowing data, government expenditure and sales tax.

These numbers will be revised downwards further once the final demonetisation impact is taken in. while banking will move up, others like manufacturing, construction and transport/trade services will move downwards, Care Ratings said. “Our estimate is that GDP growth can move down further to 6.8 per cent,” Care said.

“The government has to think of ways of providing a push to investment as the continuous decline is a worry,” Care Ratings said..

ICRA pegged the expected growth for 2016-17 lower at 6.8 per cent, stating that “projecting GDP growth for the full year by extrapolating the trends up to October 2016 for several sectors, may introduce more errors than in earlier years. This would be particularly apt for cash intensive sectors such as construction.”

On Friday, first advance estimates released by the Central Statistics Office (CSO) showed India’s GDP growth is seen decelerating to 7.1 per cent in 2016-17 (April-march) from 7.6 per cent last year, primarily due to slowdown in manufacturing, mining and construction sectors.

Crisil Research said advance estimates by CSO may have an upward bias, especially in terms of government consumption growth (23.8 per cent) and government services growth (12.8 per cent). Agriculture and industrial sector growth estimates are in line with our forecasts. Crisil had estimated GDP to grow at 6.9 per cent in fiscal 2017.

“In the wake of demonetisation, even if the situation limps back to business as usual by the end of fourth quarter, not all impacted sectors may rebound equally,” Crisil said. Sectors hitherto dealing in high value cash transactions such as real estate (and thereby related sectors such as cement and other building products), and luxury automobiles, may take longer to revive compared with others, it said.

The advance estimates released by the CSO of growth in FY2017 are unsurprising, as they draw heavily from the available data for the first half of this fiscal, ICRA said.

However, ICRA said it expects GDP and GVA (gross value added, which excludes taxes and subsidies) growth for FY2017 at 6.8 per cent and 6.6 per cent respectively, appreciably lower than the advance estimates.

According to Crisil, the outlook for fiscal 2018 will be shaped by how long the cash crunch led disruption lasts. “In our base case, we have taken it as a 2-quarter phenomenon — Q3 and Q4 and normalisation after that. In this scenario, growth will start approaching the 8 per cent mark in the next fiscal if monsoons too remain normal, Crisil said.

The CSO has released advance estimates for this financial year a month earlier in line with the advancement of the Union Budget for 2017-18 to February 1. However, the advance estimates of GDP for 2016-17 are based on the sectoral data for the first seven months of this financial year (April-october) and do not reflect the impact of the government’s November 8 decision to scrap highdenomination currency notes of Rs 500 and Rs 1,000 on economic growth.

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