CSO Estimate 2016-17
In the first advance
estimate for 2016-17 based on 6-7 months data, CSO estimated H1 2016-17 growth
to average 7.2% and forecast full year growth at 7.1%. At that time I had
revised my very cautious estimates of impact of demonetization on full year
growth from -0.2% point to a range of -0.2% to -0.5% point from the bench mark
H1 growth estimate of 7.2%.
In the just released second advance estimate the CSO has raised
its GDP growth estimate for H1 of 2016-17 by 1% point to 7.3%, leaving the full
year growth estimate unchanged at 7.1%.
If I
apply my last forecast to these adjusted numbers, the likely 7.1% growth for
full year 2016-17 is precisely 0.2% point below the revised estimate for H1 of
2016-17 i.e. at the top end of my forecast range.[i]
At this point I have no reason to revise this forecast range,
so GDP growth for 2016-17 could still end up a little below the currently
predicted level of 7.1%.
Demonetization & Sector Slowdown
It
is important to note a few sub-sector details: The rate of growth of the
sub-sector Trade, hotels, restraints, transport & communication is down
sharply from 10.7%% in 2015-16 to 7.3% in 2016-17. As my analysis of
demonetization showed, this sector was likely to be most severely affected by
de monetization, My analysis also suggested that the recovery of the
construction sector, which was expected to improve sharply during 2016-17,
would be delayed.
The data shows that growth of construction
has remained virtually flat recovering marginally from 2.8% in 2015-16 to 3.1%
in 2016-17. The third noteworthy element is that private final consumption
which was expected to get a positive boost from the sharp increase in
agricultural production after two back to back droughts has moved in the
opposite direction.
My
analysis of March 2016 did not expect an increase in the growth rate of
manufacturing sector, but an acceleration of organized/corporate manufacturing,
perhaps accompanied by a slowdown in the unorganized parts. The deceleration in
the GDP from manufacturing from 10.6% to 7.7% accompanied by a rise in sales
& profits of the large corporate sector during the first 9 months of
2016-17, indicates that this forecast may turn out to be broadly correct.
The fact that the rate
of growth private consumption growth is expected to fall only marginally from
7.3% to 7.2% is probably due to off-setting factors. The sharp increase of
rural demand arising from the recovery of agriculture and allied growth from
0.8% in 2015-16 to 4.4% in 2016-17. A normal monsoon after two consecutive
drought year would raise rural incomes in 2016-17 even more sharply than overall
agricultural production giving a strong Philip to consumption. The sharp
acceleration in government consumption which was expected, because of higher
wage payments consequent to the implementation of the pay commission award also
stimulated consumption. With disruption of daily wage labor in urban areas,
some migrants also likely returned to their villages to take advantage of
MGNAREGA employment. This would add to the government consumption expenditures.
The disruption in
consumption arising from the shortage of cash due to demonetization during
November & December 2016 and to a lesser extent in January 2017 would act
in the opposite direction by reducing consumption. The fact that inventories
grew at 17.2% in 2016-17 as against 7.9% in 2015-16 is suggestive of unsold
stocks of goods because consumption grew less than anticipated. However,
declared retail sales and consequently consumption may not have fallen as much
as actual consumption, as shown in the analysis for Q3 below.
Given all the
uncertainty created by demonetization Gross fixed investment growth collapsed
from 6.1% in 2015-16 to 0.6% in 2016-17.
Quarterly Data
It is important to recall that Annual GDP
estimates are not based on or built up from, quarterly GDP estimates but on
aggregate data available for 9 months or 12 months. On the contrary Quarterly
GDP estimates are based on an interpolation/allocation of annual estimates to
each quarter based on available indices. Thus quarterly data, at best provide
information on trends and possibly random variations from trend. They must be
used with extreme caution.
Private Consumption
The surprising increase of 10% in Private Consumption at const
2011-12 prices during Q3 could be due to a number of factors:
(1)
Sales which had happened during April-October but had not been
declared, brought on the books.
(2)
Artificial Sales receipts created to show accumulated cash as
earned income to be able to safely deposit in bank,
(3)
Temporary shift of consumer demand from unorganized to organized
(taxed) sector so as to able to use check she or digital payments based on bank
saving , as unavailable
(4)
Temporary shift in production from cash strapped unorganized
sector to organized/tax paying sector operating on check & formal credit,
(5) Base effect (lower growth
in Q3:2015-16).
How much of this could be sustained into
the next quarter. (1) & (2) are unique to Q3 and can't be repeated in Q4.
(5) depends on Q4 2015-16 growth. (3) and (4) will wind down during Q4 2016-17,
as cash is re-injected into the economy, till a small residual representing
faster digitization of economy remains. On net basis these factors could result
in a measured growth rate of private consumption in in Q4, which is slightly
higher than the actual.
Conclusion
There is a large amount of uncertainty in FY 2017-18 arising from
both the domestic and the global side. This is further magnified by uncertainty
about how the monetary policy committee and other policy organizations will
react to these sources of risk.
On the external front
multilateral organizations are predicting an increase in World growth by up to
1% point and markets are predicting two or more upward adjustments in the US FRBs
policy rate. On the downside are the political developments in the USA and
Europe, the geo-economic uncertainty this gives rise to and their
consequent negative effect on world growth. As forecasts of World growth
recovery have proved over optimistic many times since 2009, the degree of confidence in above forecasts is low.
On the domestic front the big uncertainty arises from demonetization and its impact on consumer behavior as well as the related measures that govt has taken and has hinted at taking. In the absence of data and historical experience of such a demonetization. Most initial forecasts have been determined by personal & political biases. After the second advance estimate from the CSO, the uncertainty has reduced somewhat, but the speed of the recovery in 2017-18 remains uncertain. This is because we don not know how pronounced the hysteresis effect will be, after sufficient cash has been injected back into the economy. That is the recovery could be a very sharp V shaped one or it could be U shape with negative effects lingering for a few quarters.
On the domestic front the big uncertainty arises from demonetization and its impact on consumer behavior as well as the related measures that govt has taken and has hinted at taking. In the absence of data and historical experience of such a demonetization. Most initial forecasts have been determined by personal & political biases. After the second advance estimate from the CSO, the uncertainty has reduced somewhat, but the speed of the recovery in 2017-18 remains uncertain. This is because we don not know how pronounced the hysteresis effect will be, after sufficient cash has been injected back into the economy. That is the recovery could be a very sharp V shaped one or it could be U shape with negative effects lingering for a few quarters.
Therefore my bottom line at this point remains a
GDP growth forecast for 2017-18 of 7.5% +/- 0.75% (ie 6.75% to 8.25%).
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