Are the third quarter estimates for the Gross Domestic Product (GDP) growth rate pegged at 7 per cent too good to be true in the wake of an adverse impact of demonetisation?
This is the sense given by an internal study by the State Bank of India research team in an analysis of the GDP estimates released by the Central Statistics Office on Tuesday.
According to the advanced estimates of CSO, the GDP growth was 7 per cent in the third quarter of the current fiscal, during which demonetisation had taken place. For FY17, GDP growth has been pegged at 7.1 per cent.
There is more than what the numbers speak on the surface impact of demonetisation, if one goes by the expenditure side of demonetisation.
“Interestingly, the impact of valuables on the total estimates from the expenditure side tell the story of demonetisation,” says the research study by the State Bank of India on the GDP estimates on impact of demonetisation.
“After demonetisation, there was a steep fall in the international price of gold partly because Indian demand had momentarily subsided,” SBI said in the report released recently.
This may have increased the percentage share of Private Final Consumption Expenditure (PFCE) in the total expenditure pie. PFCE includes final consumption expenditure of households and non-profit institutions serving households (NPISH) like temples, gurudwaras, etc. It relates to outlays on new durable as well as non-durable goods (except land) and on services.
Some numbers beneath the surface signify the impact of demonetisation. For example, growth in construction and finance segments are at seven-quarter lows and at an all-time low respectively, in the current base year.
But GDP estimates imply minimal impact of demonetisation. What is intriguing is that growth rates of these segments show a significant recovery in the fourth quarter, SBI said, adding that with cement dispatches for January 2017 declining a whopping 13 per cent, it is not clear how construction activity is reviving in the current quarter. Similarly, bank credit growth is still at December 2016 levels.
There is a need for more economic investigation into various aspects pertaining to demonetisation, the study pointed out.