In hindsight, we now know that even in the second and third quarters of last fiscal year, the economy was slowing

When the Narendra Modi government went on a celebratory mode after the release of October-December quarter GDP numbers (7 percent) mocking the note ban critics, Pronab Sen, former chairman of the National Statistical Commission, had a simple but serious warning to the party goers.

“The GDP figures for the January-March quarter will probably reflect the disruption caused by demonetisation more accurately,” Sen told News18, adding “you can only push out so much inventory but if it is piling up in retail stores and not being sold, the factories won’t be able to send out manufactured products.”

Sen said this at a time when top government officials and ministers went to the town to flay demonetisation critics flashing the Q3 GDP figures.

“The third quarter GDP numbers are out and as you have seen the numbers completely negate the kind of negative projections and speculations made about the impact of demonetisation," said economic affairs secretary Shaktikanta Das. “An overestimation was done about the so called negative impact of demonetisation. It is very satisfying to know that it is not there. Because we still remain 7 percent plus growth country...,” Das said.

The Q4 figure, released on Wednesday, shows Sen’s prophecy right and offer food for thought for Das and his team on what really note ban did to the economy. The cacophony over whether demonetisation damaged the economy or helped it can take a short break and those making the noise can try to do an objective look at the Q4 GDP numbers, for once. It will tell them that except for the government spending (pay commission disbursals, defence spend and other expenditure) and agriculture growth (thanks to good rains) , the fourth quarter GDP/GVA numbers show economy has considerably slowed down.

Or let’s rather put it out this way. In hindsight, we now know that even in the second and third quarters of last fiscal year, the economy was slowing but the fall became steeper with the demonetisation-induced cash crunch paralysing the cash-intensive industries for a few consecutive months. Now we know that demonetisation indeed hurt the economy at least in the short-term no matter what long-term gains the disruptive move will bring in.

Devil in details

Let’s look at the numbers now. The Q4 GDP fell to 6.1 percent from 8 percent from the year-ago quarter. The fall in GVA was even sharper to 5.6 percent in the fourth quarter from 8.7 percent in the Q4 period of previous year. But, even these figures do not reflect the true fall in the economy. As Manas Chakravarty points out in this Mint column, if one leave out government spending and agriculture components, then GVA growth plummets to 3.8 percent in the fourth quarter, compared with 10.7 percent in the comparable quarter last year if calculated in the same method. That means, the actual fall in growth is from 10.7 percent in Q4 of FY16 to 3.8 percent of Q4 of FY17, which is the Jan-March period of 2017, the column argues. Rings a bell?

But, one should be glad that finally the GDP/GVA figures have started reflecting the true picture of economy which now corresponds with other high frequency macroeconomic indicators such as bank credit growth, vehicle sales, cement sales, construction and manufacturing activity, declining core inflation and core sector growth. Demonetisation impact has finally shown on the numbers. All this is good news from the perspective of quality data since it attaches more credibility to the official numbers. The fact that high frequency economic indicators and headline GDP numbers have shown diverging trend has perplexed the economists for a while. Now, that problem is addressed.

Looking a little closer into the GVA data, manufacturing sector has taken a major beating with the growth slowing from 12.7 percent in Q4 of last year to 5.3 percent in the Jan-March period now. Trade, hotels and transport sector growth is down to 6.5 percent from 12.8 percent in the comparable period of last year, construction sector growth down from 6 percent to a negative 3.7 percent and financing/insurance/real estate sector down to 2.2 percent from 9 percent in year-ago period. What saves the day for economy is growth in agriculture which improved to 5.2 percent in Q4 from 1.5 percent in fourth quarter of last year. Also, government consumption expenditures at constant prices has shot up to 32 percent from mere 2.4 percent while private consumption growth figure has declined to 7.3 percent from 11.8 percent.

But, the actual investment activity on the ground remains muted as reflected in the gross fixed capital formation (GFCF) figures. GFCF fell to a negative 2.1 percent in the fourth quarter from 3.9 percent in the comparable quarter of last year. This is a major concern for an aspiring economy. Perhaps, it is time for Reserve Bank of India (RBI) too to acknowledge the actual scenario in the economy by reviewing their assessment on demonetisation impact. The RBI has so far maintained that note ban isn’t a major worry for growth. Does it hold the same view even after the Q4 figures?

What can happen ahead? A sharper-than-expected slowdown in the fourth quarter is an indicator that the slowdown might continue in the April-June quarter as well. If the economy surprises on the upside, it is good news, but one needs to wait and see. Typically, any full-fledged recovery comes with a major lag after a lull phase in the economy.

One thing that dominated the headlines after the GDP data release on Wednesday was that India has lost the fastest growing economy tag to China again. In the fourth quarter, China grew at closer to 7 percent where India is about 80 bps lower. But, this comparison is the most foolish thing to do. Chinese economy is much bigger than what India has. Losing the tag to China should come as India’s last concern. It is time for Indian policymakers to acknowledge what fundamentally went wrong for India’s growth prospects and what needs to be done to lift the economy back to a healthy growth trajectory. At least now, they can come out of the denial mode and not make fool of self by pretending all is well. There is an economic slowdown and we have to face it and think of solutions.

(Data support from Kishor Kadam)