Unusual times, usual ways

Methods to use GDP estimates cannot account for the shock caused by demonetisation

THE LATEST OFFICIAL data on GDP growth has shown that the economy grew at 7 per cent in the quarter ending December 2016. It belies the argument that the economy was hit hard by demonetisation. But this data is not surprising given that the budget for 20172018 assumed that the economy will grow at 11.75 per cent. The government has also not changed the assumption of an 11 per cent growth rate for the current year (2016-17) in the budget. So, the budget assumed that demonetisation had no impact on the economy. The budget figures were provided by the CSO. It was unlikely that the organisation would provide drastically different figures for the GDP estimate.

A GDP figure of less than 7 per cent would have implied that the budget figures for both 2016-17 and 2017-18 are wrong. That would have meant that all the budgetary calculations are incorrect and created turmoil in the economy. Admitting lower growth would have adversely impacted the stock markets, the international sentiment about India and the business environment in general. The data just released shows that investment has taken a hit of about 3 per cent. More bad news would have made the post-demonetisation recovery even more difficult.

The growth projected by the OECD is almost the same as the official figure. The IMF had earlier said that demonetisation will have a marginal impact and suggested that the recovery would be fast. But it needs to be remembered that neither the IMF, nor the OECD collect independent data; they rely on figures provided by the Government of India.

Predicting GDP growth is no mean task. Data has to be generated from a number of sectors and sub-sectors. Each sub-sector has its own method for collecting data and calculating the growth rate. The methodology is time-tested and, therefore, not questioned by analysts. Moreover, the actual data comes after a time lag which means that only estimates can be made and these are periodically revised. But is it right to apply the methodology that is used in normal times when the economy has experienced a big shock? Surveys by manufacturers, business associations and others indicate that over the last four months, employment, production and