Advance GDP estimates may not fully capture demonetisation effect

Much of the Q3 data will simply not be available for the CSO to factor in its calculation

The advance estimates of GDP for 2016-17, to be released later this week, might not fully capture the disruption in economic activity due to demonetisation. As these estimates will be based mostly on data till October, before demonetisation kicked in, they might paint a rosier picture of the economy than the ground reality. 

Further, as the Budget numbers will be based on advance estimates, to be released by the Central Statistics Office, it is possible that those, too, are optimistic in their growth projections. 
 

Traditionally, CSO published advance estimates of GDP growth on February 9. To arrive at these estimates, CSO would take actual data for the first three quarters of the financial year and forecast growth for the fourth quarter based on past trends. 

With the central government deciding to table the Union Budget in Parliament on February 1, the CSO has also advanced its release calendar. It will now release advance estimates in the first week of January. This means that much of the third quarter (October-December) data will simply not be available for the CSO to factor in its calculation. 

“Earlier, the advance estimates were based on three quarters of actual data. For the final quarter, past data was looked at to arrive at a trend. But now, data will only be available till the end of the second quarter,” says Pronab Sen, former chairman of National Statistical Commission.

In large measure, the quarterly estimates of growth are based on corporate results. For the third quarter, the results season typically begins in the second week of January (Infosys is scheduled to announce its results on January 13). This means that this time around, the third quarter results will not be available to the CSO for its calculations. It will have only data for the second quarter (July-September) to use in its calculations.

Another indicator the CSO relies on is the index of industrial production (IIP). As of now, IIP data is only available till October. Data for the month of November will only be released in the second week of January. While this indicator will also not be available to the CSO, it could estimate part of it using core sector data, which accounts for 38 per cent of IIP, for November. 
 

A release from the Ministry of Statistics and Programme Implementation confirms the limitations of data. “The sector-wise estimates are obtained by extrapolation using various indicators like (i) index of industrial production of the past seven months of the year, (ii) financial performance of listed companies in the private corporate sector available up to the quarter ending September,” it says.

Some data, though, will be available to the CSO. These include first advance estimates of crop production and expenditure of the central and state governments for the past seven to eight months. 

To estimate service-sector growth, data on sales tax, deposits and credits, passenger and freight earnings of railways, civil aviation, and number of telephone connections for the last seven to eight months will also be available. 

However, the data have some limitations. As Aditi Nayar, principal economist at ICRA, points out: “The availability of sales tax data depends on whether states have furnished this information.” 

Adding to the uncertainty is the likelihood that the banking sector might show higher growth during this period. “For the banking sector, data up to December may show higher net interest income, pushing overall growth of the sector,” says Nayar.

While the CSO will also have access to tax data (excise, customs etc) till November, given the paucity of other high frequency economic data, economists remain sceptical about its estimates. 

“The impact of demonetisation is still unfolding. Estimating GDP for the full year in this scenario by extrapolating the trends up to October may lead to some errors,” says Nayar. 
 

Madan Sabnavis, chief economist at CARE, concurs. “Now that we have pushed it back by a month, there is a lot of room for error. It is possible that these estimates will be scaled down later.” 

It is possible that an accurate reflection of the ground realities after demonetisation will emerge only when the CSO publishes its third-quarter estimates on February 28, alongside its second advance estimates.