Was the demonetisation scare an old wives’ tale?
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Totally belying the fears of almost everyone, the Central Statistics Office’s (CSO’s) estimate of real gross domestic product for the December quarter came in at a robust 7%, while growth in gross value added (GVA) was 6.6%. Going by these numbers, the impact of demonetisation, which had resulted in the withdrawal of a huge portion of the currency in circulation, was negligible. GVA in the September quarter, before demonetisation, was a smidgeon higher, at 6.7%.
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Let’s look at the numbers on the expenditure side first. Private final consumption expenditure, in real terms, was up 10.1% compared to the same period in the previous year. In the second quarter, private consumption was up 5.1%. According to these numbers, therefore, consumption received a huge boost in the third quarter, in spite of demonetisation.
Is that because of a base effect? Not really. The 10.1% growth in personal consumption was on top of 6.8% growth in the December quarter in 2015. And the 5.1% growth in the September 2016 quarter was on top of a 6.7% growth in the September 2015 quarter. It is interesting that CSO believes the growth rate of private consumption almost doubled in the December quarter from what it was in the previous quarter, despite demonetisation.
But as everybody says, the expenditure side quarterly data is sometimes surreal and we should ignore it. Let’s look instead at GVA.
The first thing to notice is that real GVA growth in the December quarter, at 6.6%, came on top of 7% growth in the year-ago period. Growth in the September 2016 quarter, at 6.7%, was on top of a high 8.4% growth in the September 2015 quarter. So we can say that there is a positive base effect for the December 2016 quarter GVA data, which makes the growth rate seem higher.
But not every sector has a positive base effect. Manufacturing growth, for instance, was at 6.9% in the September quarter, which was on top of 10.3% growth in the year-ago quarter. That improved to 8.3% in the December 2016 quarter, on top of a 12.8% growth rate in the December 2015 quarter. In other words, manufacturing did better in spite of a higher base.
That is in tune with the corporate results for the December quarter, which show very high growth in operating profits. However, some economists have pointed out that the numbers do not adequately capture the informal sector, which would be the worst affected.
It’s not just manufacturing that has done well. The “trade, hotels, transport, communication and services related to broadcasting” sector showed higher growth than in the second quarter, despite suffering from an adverse base effect. According to these numbers, the anecdotal evidence about the disruption in trade was rubbish.
GVA growth in construction is 2.7% in the December 2016 quarter, on top of 3.2% growth in the year-ago quarter. Contrast that with 3.4% growth in the September quarter, which came on top of zero growth in the September 2015 quarter. Simply put, growth in the construction sector too doesn’t seem to have been much affected in the December 2016 quarter. That’s despite all the talk about the real estate sector being badly hit.
The only sector that was badly affected by demonetisation was the “finance, real estate and professional services” sector. But no matter, it will bounce back soon.
One reason why GVA growth didn’t suffer too much in the December quarter was because government expenditure and high agricultural production acted as buffers. Indeed, government final consumption expenditure showed a growth of 19.9% in the December quarter.
As Gaurav Kapur, chief economist at IndusInd Bank, points out in the chart, real GVA growth after stripping out agriculture and “Public administration, defence and Other Services” was at 5.8% in the December quarter, compared to 6.4% in the previous quarter. That 60 basis points fall is the demonetisation impact on GVA. Or at least CSO seems to believe so.