The Finance Ministry has in the Union Budget finally given an estimate of the impact of demonetisation on growth for 2016-17.
Nominal GDP growth for the current fiscal year will be 11 per cent, about 90 basis points lower than the first advance estimate of GDP made by the Central Statistics Office (CSO), the Ministry has stated in the Budget documents. However, this disclosure is tucked away in the medium-term fiscal policy statement and has been missed by many economists and politicians.
The Finance Ministry has estimated that the nominal GDP for 2016-17 would be ₹150.75 lakh crore, against CSO’s estimate of ₹151.93 lakh crore. The CSO’s estimate released on January 6 had not calculated the impact of demonetisation in the advance estimates of growth.
The government has stated in the Budget documents that it has “moderated” the numbers estimated by the CSO to account for “trends of decline in growth rate” following the demonetisation of ₹500 and ₹1,000 banknotes on November 8, 2016.
The GDP numbers are important to the Budget making exercise as all projections for tax collections and government expenditure are based on these estimates. Various ratios such as fiscal deficit are also calculated as a percentage of GDP.
Usually, the Finance Ministry uses advance GDP estimates made by the CSO for Budget preparation. By moderating the numbers estimated by the CSO, the Finance Ministry has made a departure from that standard practice.
This has prompted former Finance Minister P Chidambaram to question the nominal GDP numbers. “What is the correct nominal GDP number for 2016-17…Which number should we believe,” he asked at a Congress press conference.
The estimates of nominal GDP and growth assumed in the revised estimates for 2016-17 Budget is incidentally close to the estimates assumed for presenting the Union Budget for 2016-17 on February 29, 2016.
However, the nominal GDP could turn out be much higher than assumed in the Budget if indeed the economy expands by 11 per cent and that it may be similar to the first advance estimates of the CSO. This is because the Finance Ministry and CSO used provisional estimates of growth for 2015-16 to estimate growth for 2016-17.
The 2015-16 GDP numbers were updated last week with the CSO releasing first revised estimates of economic expansion. These numbers were not taken into account in the Budget calculation.
As per the first revised estimates, the economy expanded to ₹136.75 lakh crore in 2015-16, higher than the provisional estimate of ₹135.76 crore. The upward revision of the GDP numbers would help the country’s fiscal position look better than estimated in the Budget documents.