The period from 2011 to 2020 may be called the decade of incomparable gross domestic product (GDP) growth. Due to a battery of events in the last six years, the numbers may not be comparable across time periods and may get revised to such an extent that the revised growth trend may alter. Blanket criticism of the Union ministry of statistics and programme implementation (Mospi) or the government not only misses the nuances of the GDP estimation process but provides a hyper-simplistic explanation, which is incorrect. The author estimates that over the next six quarters, i.e. till Q4 FY19, the GDP numbers reported will initially throw up positive surprises, followed by a period of volatile GDP revisions. Other macro numbers, however, may not improve in tandem. Let us see under what assumptions and scenarios this can play out.

Formalization and normalization to surprise on the upside

The GDP growth estimates of H2 FY2018 will benefit from the lower base of H2 FY2017 as well as normalization of economic activity. In FY2015 and FY2016, the GDP in H2 was 104.3% of H1 GDP for the same financial year. In FY2017, the H2 GDP was 103.3% of H1 GDP. This may be due to demonetization. The impact of ‘normalization’ of the economy may add 1% to the real GDP growth in H2 FY2017. On similar lines, the ‘normalization’ related to the launch of the goods and services tax (GST) may increase the real GDP growth by 1% for Q1 FY2019.

However, the formalization of economic activity attributable to GST will have a higher positive impact on the GDP growth number and, possibly, for a longer period of time. Various economic estimates suggest that India’s parallel economy, i.e. economic activity which is below the official radar and thus not accounted for in GDP measurement, is 25% to 50% of the official GDP value. Arguably, if the entire parallel GDP is formalized in one year, it will give a humongous lift to the GDP growth number, not because economic activity may have improved but because more of it is measured. While the rate of formalization of the economy may be difficult to predict, one may make a range of assumptions and estimate the impact of calculated real GDP growth.

Let’s go with the estimate that the parallel economy is one-fourth of Indian GDP and assume that it will be formalized over a 10-year period. This formalization rate of economy, where more economic activity will get measured, should provide a 2.5% to 3% boost to real GDP growth. So there is a possibility that the H2 FY2018 real GDP growth may be above 8% to 8.5%. The full-year GDP forecast by many forecasters is in the range of 6.7% to 7%, thus building in an expectation of 7.5% plus GDP growth rate in H2 FY2018, given that the H1 FY2018 GDP growth is 5.8%. Moving further into FY2019, this formalization trend would have ensured a 7% real GDP growth floor at least as far as numbers are concerned.

Inadequate data infrastructure to produce ‘shocks’

However, there are risks to this growth trajectory posed by suboptimal data infrastructure for collecting economic data. While GDP estimate revisions are commonplace globally, the high dependence on the availability of periodic survey results, which are delayed, aggravates the problem in India. For the annual survey of industry, the latest available data are the provisional numbers till 2014-15. The 2016-17 survey, which will capture the impact of demonetization and GST, will only be available in 2019, and then we will get a more realistic estimate of FY2017–FY2018 GDP. But the biggest variability in GDP numbers may come in 2018 when the National Sample Survey Office (NSSO) survey on household expenditure for 2016-17 will be published. Existing GDP estimates are based on the 2011-12 survey. This input has a significant bearing on estimating private final consumption expenditure, which is 55% to 60% of India’s GDP. This will be incorporated in the GDP calculation from 2019, which may show a very different picture of the GDP’s trajectory from 2013 to 2019.

Nonetheless, the GDP formalization benefit stays. In fact, unless the revised GDP numbers are released in 2019, the GDP growth number may suggest a sustained recovery from Q2 FY18 all the way into FY19-FY20. In this era of yo-yo-ing GDP estimates, but upward bias nonetheless, if other economic indicators such as capex, corporate earnings or job growth do not palpably pick up, then the cacophony about the GDP number may increase.

Travails of a ‘high’ GDP growth number

The recovery of GDP, as may be perceived by the ‘reported’ number in conjunction with stabilizing or upward bias in inflation, may actually create a stronger argument for an interest rate hike, which again may be counterproductive. If the government focuses exclusively on the GDP number, then it may again, in 2019, go back to the ‘India Shining’ mode of 2004. However, it can use the anticipated higher GDP to go for a fiscal push, since the fiscal deficit ratio may continue to remain strong. This may go a long way in reviving the real economy, including jobs, capex and consumer spending, rather than convincing the common man that the economy has recovered because the GDP number is higher.

Deep Narayan Mukherjee is a financial services professional and a visiting faculty at IIM Calcutta.

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