The seven percent syndrome – understanding the latest GDP numbers

The recent announcement of third quarter GDP growth rate figures at 7% by the CSO had stirred up a hornet’s nest among those who have been ardent critics of demonetisation, and who have been expecting a big dent in the growth figures post demonetisation.

So much so, even many eminent persons started casting aspersions on the CSO and insinuated that the numbers were “cooked up”, or even personally directed and stage-managed by Prime Minister Modi and his small team of advisory that worked on demonetisation to showcase that demonetisation indeed had no effect on the economy.

Such was their disappointment that the numbers didn’t suit their narrative, even people like Ramachandra Guha went on to quote newspaper articles that had even glaring arithmetic mistakes  in the difference between the original and revised estimates, to push their agenda.

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The ‘alternative maths’ (read about this incident in detail here)

The problem with many of these people is that, their pathological hatred towards one man, Narendra Modi, and his dispensation is such that, at any cost they want to make any of his moves look like a total failure and in that excitement to push their agenda they often fail to see the reality, and paint a picture as though every institution in this country, and every number that comes out of this government are all lies, micro-managed and promoted by Modi and his team, rather than taking a honest and objective look at it.

If one would carefully look at the numbers and how the CSO does the growth estimation, they have been consistent and had considered the impact of demonetisation too in the Gross Value Added (GVA) number in the GDP, which shows a sharp decline at 6.7% compared to 7.8% in FY’16 as per this report. It is the improvement in Indirect taxes that has made it healthier. Besides for every drop in certain sectoral growth, there has been rise in some other, like cement output decrease vs steel output increase, two wheeler sales decline vs agri output increase etc. Also the decline in bank credit does not mean decline in all credit, as there definitely was an increase in borrowings from bond market, leave alone other private credit arrangements between parties to ease out the situation. So selectively picking and choosing only those data that suit one’s narrative is at best being so naive and at worst being so prejudicial.

Fundamentally they miss this core point (or choose to ignore it) that demonetisation is a smart political move first, like how many many people do consider including such economists like Swaminathan A Aiyar in his latest article, with stated and unstated political objectives or goals. The fact that this was not a RBI initiated directive or Finance Ministry or CEA initiated, but directly from the highest political leadership of the country itself is self-evident. While the stated goals have been repeatedly articulated by the PM himself, the unstated could be only inferred by seeing how badly it has affected other opposition parties (either from the uproar they make like in the case of TMC, BSP etc or through the results of elections in terms of who have been badly affected). In any case, the easiest way to measure the success of it as a political move is election results and so far all civic body election results in different parts of the country are giving a thumbs up to it. We will also wait for the big ones this weekend to know how those too go.

From economic point of view, we need more data before we can judge the full impact of this measure, like how much of black money was actually collected/declared through this period, how does that fare against any other losses (in jobs, GDP etc temporary vs long term) and over a period of time only can fully ascertain the effects, as both the effects of tax due to black money collection and the GDP and such cannot be judged over one or two quarters.

One has to also see how the informal economy (cash transactions that were not part of the data points in the formal GDP numbers) has been affected as this measure would have created some cataclysmic changes in that. That the parallel informal economy will at least partially migrate to mainstream (specifically the No:2 trade ), would only improve the overall GDP numbers.

Besides, the deposit surge in banks, and any possible interest rate drop due to that and many such impacts need to be seen coherently. Hopefully one could get a clearer picture earliest by middle of next year only to assess the full impact. So any opinion on this, in favour or against it from an economic point of view would be too premature now as something of this scale and size has never been attempted by anyone anywhere in the world.

There are other benefits due to this like how this had brought down insurgency, to some extent terror/hawala money (including the ones on the eastern and north eastern border), how it has given a shock to the system and made people quickly migrate into a non-cash medium of exchange for most of their transactions, including a possible rapid digitisation of rural India thanks to this, how many State Utilities like UPSEB and Discoms benefited (at least one time) in collecting their arrears and such (see report).

Therefore viewing this event through a very narrow and limited perspective and concluding anything based on one quarter number would be myopic and prejudicial given the impact of such a measure that is unprecedented by its sheer size and scale. In any case if one were to ask the people on the street, what is their expectation of the GDP growth rates, the majority would say anywhere between 6 to 8%. And that is what the most authentic reports by the best source on this which is the CSO, also has to say on this – exactly at the midway between 6 and 8%. Except that, if the CSO had said it was closer to 6, the same critics (who are both real and social media economics experts) would have said, “we told you so!”

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