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Q3 GDP figure relief to Modi

Back from London, Finance Minister Arun Jaitley, said that the third quarter GDP was “substantially impacted” by demonetisation. He cited growth in agriculture (4.4 per cent over previous year’s 0.8 per cent) and manufacturing as reflecting “the minimal impact” on GDP. He disputed claim of rural sector distress.

Q3 GDP figure relief to Modi
The Central Statistical Organisation (CSO)'s surprising projection of 7 per cent GDP growth in the demonetisation-scarred third quarter (Oct-Dec) of 2016/17 must be hugely comforting for the Modi Government. And it could not have been more timely, as the Prime Minister was battling hard in eastern UP, where the prestigious poll since 2014 headed into the final phase, not excluding Modi's own Parliamentary constituency. Modi has been double quick to throw barbs, he is good at (keeping in view the note ban critics in the top economic genre) and telling his big voter audience of "how hard work ('a poor man's son' in trying to improve the economy) is more powerful than Harvard".

Earlier, Economic Affairs Secretary Shaktikanta Das, cited how the GDP number "negates" the impact of demonetisation, savagely run down by economists at home and abroad, and he was also sure growth would not taper off in the coming quarter or the next. Short-term pain is over and long-term gain begins, so he avers.

Back from London, Finance Minister Arun Jaitley, tended to be less belligerent, saying the third quarter GDP was "substantially impacted" by demonetisation. He cited growth in agriculture (4.4 per cent over previous year's 0.8 per cent) and manufacturing as reflecting "the minimal impact" on GDP. He disputed the claim of rural sector distress.

Government's Data Bank does not come up with clarifications generally when doubts arise. Even its sudden revision some time back, of economy's base year to 2011/12 and not coming up with relevant data on past years had drawn criticism for lack of clarity on the rationale behind such significant change.

But now, one has to wait and see what CSO does produce by the end of May for the fourth quarter (January-March) of 2016/17. Hopefully, the estimates for the third quarter (7 per cent) as well as for 2016/17 GDP now projected at 7.1 per cent, would undergo revision which might perhaps throw more light on what has nevertheless turned out to be a dismal year for the Modi Government.

CSO's current advance estimate for 2016/17 shows the economy will decline to 7.1 per cent even without fuller data on third and fourth quarters from 7.9 per cent in 2015/16.

The impact of demonetisation itself (announced on the night of November 8) would have begun to take hold only from November 10, after 40 days into the third quarter (Oct-Dec). The tight cash squeeze did not ease till mid-January when officials were more relaxed to talk about progress in "remonetisation" under way and of cash shortage easing.

As it is, CSO had incomplete information for the third quarter itself, even granting that official data do not take into account the disruptive social impact of whatever the nature of measures with far-reaching impact on the economy and society, whether a well-thought out or one of arbitrary display.

CSO would have very little to do with the damage to cash-intensive sectors, specially the unorganised sector accounting for more than three-fourths of the economy. No wonder, the continued distress for the poor, the largest unbanked segment, and urban consumers, retail trade, informal occupations, loss of wages and jobs leading to some migration of unemployed become inconsequential for data coverage even in our growth supposed to be "inclusive".

The Monetary Policy Committee at its meeting on February 7-8 also took a limited view on demonetisation, concerned as it was more with inflation management. It merely cited "anecdotal evidence pointing to some distress sales of perishables" accentuating the decline in vegetable prices which would rebound as "the effects of demonetisation wear off".

However, it was also noted, "transitory effects" of what was a massive withdrawal of money in circulation had yet to be assessed. For his part, Dr Urjit Patel, RBI Governor opined, at the MPC meeting that evolving macroeconomic conditions remained clouded.

Nevertheless, on overall assessment including global uncertainties, MPC projected growth in 2016/17 at 6.9 per cent on the expectation of a bounce-back in discretionary consumer demand and restoration of economic activity in cash-intensive sectors in the fourth quarter (Jan-March). CSO's estimate (GVA) is 6.7 per cent as against 7.8 per cent in 2015/16. While a spurt in tax receipts and a reduction in subsidies could have also contributed to improved GDP showing by CSO for Q3 (GDP at 7 per cent and GVA 6.6 per cent), a fuller economic impact of demonetisation will continue to remain masked for quite some time to come, given the data infirmities.

All said and done, India's growth suffered a serious setback in 2016/17, such as to draw the attention of all international financial institutions, which revised down their growth projections. This does not take away the label of India being the fastest-growing economy. After IMF's 6.6 per cent for the current year, OECD has also cut its earlier projection of 7.4 per cent to 7 per cent saying the economy could do better with 7.3 per cent in 2017/18.

But all these assumptions of growth recovery into 2017 are founded on a formidable array of reforms, increasingly challenging in the present global context, even for the Modi Government left with only one more Budget- 2018/19 early next year. These relate to land, labour, banks' balance-sheets, bringing GST into early operation, and more steps needed to improve the ease of doing business, all of which should help to revive private investment.

At the same time, corporate deleveraging has to make steady progress while the Government and RBI have to do much more, with a greater sense of urgency, to tackling the worst-ever crisis in the banking system, mainly the over-stressed public sector banks.

The Monetary Policy Committee had urged quicker resolution of the banking sector's non-performing assets (NPAs) and also for hastening recapitalisation of the banking sector. That, it said, would help to improve the pace of transmission of policy lending rates which had been cut by 175 basis points over the last two years and spur private investment.

Though hailed as "star performer" and fastest-growing economy, India's growth has remained lacklustre at or a little above 7 per cent, as an average for the first three years of Modi Government and without creating the requisite jobs. It is one of the major failures of the Modi Government, inevitably delaying the return of "ache din" to aspirant youth who had heavily backed Modi's ascension to power.

The Prime Minister remains popular in the country but performance counts more and it will be seen how well his Government seizes the opportunity for striking accomplishments over the next two years in the run-up to 2019 Lok Sabha election. The outcome of the UP elections, to be known on March 11, will largely determine the course of polity in this interregnum.

(The views expressed are strictly personal.)
S Sethuraman

S Sethuraman

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