It was expected that demonetisation would have an adverse impact on the GDP of the country. This is because demonetisation abruptly pulled out 86 % of the currency in circulation from the economy and caused major disruption, especially in the informal sector which is predominantly cash based and account for 45 % of GDP.
(For a basic understanding on demonetisation, you could read the following articles:
- Demonetisation of currency in India: Explained
- The Impact of Demonetisation
- Should India make a transition to the cashless economy?)
Post demonetisation, international organisations like the IMF cut the growth forecasts of India for 2016-17 from 7.6 % to 6.6% But, the Central Statistics Office (CSO) has recently announced that India’s growth for Q3 (Oct-Dec) for the financial year 2016-17 is 7.1 % (higher than expected).
This article discusses the possible explanations for the higher estimates of GDP growth by CSO despite demonetisation.
- The informal sector is not fully captured in the GDP estimations. This is because of lack of adequate data. We make assumptions of the production in the informal sector based on the available data in the formal sector. The formal sector was not affected by the cash crunch. For example, the informal manufacturing data is estimated on the basis of Index of Industrial Production (IIP). Other indicators used in the GDP estimates are the financial performance of listed companies in the private corporate sector, the first advance estimates of crop production, the accounts of the Central and state governments, and information on sales tax, deposits and credits, passenger and freight earnings of the railways, passenger and cargo handled by civil aviation, cargo handled at major sea ports, and sales of commercial vehicles. These are formal sector indicators. So, it is possible that when full data is available next year, the GDP growth is revised downwards.
- The effect of an event on agriculture is visible only with a 3-6 month time lag. Therefore, the impact of the cash crunch on agricultural sector will be evident only in the GDP of the next two quarters. Despite demonetisation, the agricultural sector grew at a healthy rate in Q3 because of normal monsoon in the previous quarter (June-July) after two successive droughts.
- Quarterly growth estimates (Q3 for 2016-17 in this case) are compared not with the GDP of the previous quarter (Q2 for 2016-17), but with the GDP of the same quarter in the previous financial year (Q3 for 2015-16). The State Bank of India has opined that the GDP estimate of Q3 for the previous year was revised downwards. This has resulted in higher growth figures for the third quarter of 2016-17 due to a lower base in 2015-16.
- Government final consumption expenditure grew at a massive 19.9% in year-on-year terms in the previous quarter. This fiscal stimulus helped to revive investment and retain growth even after the liquidity squeeze.
To conclude, the impact of Demonetisation on GDP will be clear only in the next year when adequate data is available. This advance estimate released by CSO excludes the effect of the cash crunch.
References:
//www.dailyo.in/business/gdp-growth-rbi-demonetisation/story/1/15937.html
//www.livemint.com/Opinion/7aViGbD9xu8GJJO65gmDJK/Demonetisation-and-its-impact-on-GDP-growth.html