What the GDP numbers do not say

The GDP forecast for FY17 presented by the Central Statistics Organisation is based on regular extrapolation of data points which are available with the agency and does not include any conjecture of the impact of demonetisation.

The growth rate has been scaled down to 7.1 per cent based on data available till October. The positive impact on banking witnessed in November has been consciously ignored when making this forecast. While the final conjecture would vary across estimators, the implicit numbers for H2 of FY17 would be an objective exercise. The only assumption made is that the H1 numbers released in November have not changed as of date.

Growth in gross value added (GVA) is expected to be 7 per cent for the year and with the first half witnessing an increase of 7.2 per cent, growth in the second half would be 6.7 per cent. This will be a step down by nearly 50 bps. The sector-wise growth rates that are implicit for the second half are presented in Table 1. Some of the growth numbers for the second half are interesting. Farm sector growth is expected to accelerate in this period to 5.2 per cent, which means that the rabi harvest will be even better than the kharif. Curiously, the Government had removed import duty on wheat earlier, which gave the impression that there could be some downward movement in output. Hence, this number is reassuring.

Manufacturing is to continue to slow down in terms of value addition to 6.7 per cent from 8.1 per cent. This does not bode well for IIP growth numbers for the next five months. This is so as, in the past, low physical growth has been associated with high value added, and hence, lower GDP from this sector will imply even lower growth in IIP. The picture till October has been unsatisfactory and these derived estimates give the impression that it will not get any brighter this year.

An uptick in construction which is implicit for the second half will have to get a push from the Government as private investment is unlikely to pick up, especially after demonetisation. The numbers for trade, transport and communication will slow down perceptibly, from 7.6 per cent in H1 to 4.5 per cent in H2. This low growth would normally be associated with the demonetisation effects as this sector was likely to be affected the most since output lost in one quarter cannot be recouped in another.

The finance and insurance sectors are again expected to do better — as this number excludes the higher deposits growth of November the final outcome would be substantially better. Lastly, the government sector is set to do very well and be the leading sector for the year. Quite clearly this means that the fiscal provisions are going to be satisfied fully and there would not be any expenditure cuts.

The inference that can be drawn from these derived numbers is that in case this lower aggregate performance is not based on the effects of demonetisation, then the negative fallout would tend to further depress the H2 outcome and hence there would be more pressure on the annual numbers.

Two areas would be of relevance. The first is manufacturing and transport services which are the ones affected negatively. The other is the finance sector which could show a better performance. The net effect would be reflected in the final estimates.

The expenditure side of the GDP story can be viewed at current prices and the implied data points for H2 are presented in Table 2. GDP growth is to be higher in H2 which can probably be explained by the higher inflation numbers expected with commodity prices moving up. Consumption growth is to slow down from 12.1 per cent to 10.2 per cent before demonetisation. Hence, if there were serious issues in consumer spending in November and December, there could be a further slowdown.

The disturbing element here is fixed capital formation which has to increase by 5.7 per cent to turn a negative growth in the first half to (plus) 1.7 per cent for the year. The question is who will spend this money? Private sector investment is definitely not showing signs of a recovery and hence it has to be the Government chipping in through the two elements of construction and public administration/defence. The capital formation rate will still be lower at 25.6 per cent in H1 against 27.7 per cent in H1 as growth in the denominator GDP is higher.

Government consumption expenditure has to increase by 38 per cent during the second half to enable this growth process. Hence, it does appear that growth in the second half has to be propelled by the Government in every way— both revenue (for GVA growth) and capital expenditure (for capital formation) to ensure that the path remains steady at a lower level.

How would this gel with the budgetary numbers?

The CSO has an advance estimate of growth of 7.1 per cent for the year at constant prices and 11.9 per cent at current prices. The Budget for FY17 had worked on a number of 11 per cent at current prices. Hence there would a marginal benefit for the Government in meeting its target of 3.5 per cent as GDP would be higher than the assumed projection for FY17 by ₹1.27 lakh crore.

While this may not be very critical for FY17 where the Government is borrowing less as per the calendar for the last quarter, it goes as a critical input for the next budget targets. As there will be no other official forecast for the Government to work on before the Budget is presented, the 11.9 per cent growth figure would automatically be the base for FY18. Hence, the number of 7.1 per cent growth has to be largely correct or else the calculations would get shaky.

This, in essence, would be the major implication of the GDP estimate provided by the CSO that could be subject to change in course of time.

The writer is the chief economist at CARE Ratings. The views are personal