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Believe in Indian GDP Growth at Your Own Peril

Mar 1, 2017


Yesterday (i.e. February 28, 2017), the Ministry of Statistics and Programme Implementation (MOSPI), published the quarterly estimates of the Gross Domestic Product(GDP) for October to December 2016.

As per this estimate, the GDP grew by 7 per cent for the October to December 2016 period, in comparison to the same period in 2015. In fact, MOSPI estimates that the Indian GDP for 2016-2017 will grow by 7.1 per cent.

What this tells us is that there has been almost no impact of demonetisation on economic growth (as measured by GDP growth), even during the period of October to December 2016, when demonetisation happened.

The question is how believable is this? One way of measuring the GDP is through the expenditure method. Under this method, the GDP is obtained by adding private consumption expenditure, government consumption expenditure, investments and net exports (imports minus exports). The private consumption expenditure forms a bulk of the GDP measured through this method.

The interesting thing is that the private consumption expenditure (at constant prices) for the October to December 2016, rose by 10.1 per cent, in comparison to the same period in 2015. This is the second fastest rise since June 2011. The data for the new GDP series adopted in January 2015 is only available up until then. GDP at constant prices essentially takes inflation into account.

Take a look at Figure 1. It shows the one year growth rate of private consumption expenditure, over the last five years.

Figure 1

The private consumption expenditure grew by 10.1 per cent in the October to December 2016 period. This, as mentioned earlier is the second fastest growth rate over the last five years. This seems unbelievable given that between November 9 and December 30, 2016, the currency in circulation had gown down dramatically, as Rs 500 and Rs 1,000 paper notes were demonetised and suddenly had no value.

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Figure 2 shows this.

Figure 2

With the currency under circulation crashing, there wasn't enough currency going around to carry out transactions. A bulk of the transactions in the Indian economy are carried out in cash. As per a PwC report cash/currency accounts for 98 per cent of consumer payments by volume in India. Take a look at Figure 3.

Figure 3

The Economic Survey of 2016-2017 points out: "The Watal Committee has recently estimated that cash accounts for about 78 percent of all consumer payments." Hence, cash/currency accounts for bulk of consumer payments in India.

Demonetisation essentially rendered 86.4 per cent of the currency in circulation useless overnight. This made consumer transactions very difficult to carry out. While, the government did replace the money rendered useless with new money, but initially only Rs 2,000 notes made it to the financial system. These notes were very difficult to use because people found it difficult to give change, when almost no new Rs 500 notes were available. Hence, they were as good as useless for most of November and December 2016.

In this environment, how did private consumption expenditure grow by 10.1 per cent, the second fastest since June 2011, is a question worth asking?

One possibility is that people may have borrowed and bought things and in the process private consumption grew. Now take a look at Figure 4. It essentially shows the growth in retail loans given by banks between October and December across several years. Retail loans include loans given by banks to buy cars, two-wheelers, consumer durables, homes, credit card outstanding etc. They are a good measure of how robust the private consumption scene in the country is.

Figure 4

The growth in retail loans between October and December 2016 was almost flat at 0.5 per cent. This isn't surprising given that most of the retail banking staff of banks was busy dealing with all the cash making it back to the banks because of demonetisation. What the figure also tells us is that the growth in retail loans between October to December 2016 has been the slowest in last five years.

Figure 4 clearly tells us that people did not borrow and spend between October and December 2016. So, the question is where did the growth in private consumption expenditure come about? One theory that has been offered is that many people bought a lot of gold using their old Rs 500 and Rs 1,000. The goldsmiths helped them by backdating their purchases.

This is one of those things that sounds to be true as soon as one hears it. But what does data tell us about this? India does not produce any gold of its own. If a lot of gold has been bought in this way, then the gold import numbers should go up in the months to come. The initial evidence on this front suggests otherwise.

Take a look at Figure 5.

Figure 5

Gold imports were high in November 2016 because of the festive season as well as the marriage season. And typically gold imports are high in November. If a lot of gold was bought by those who converted their black money held in the form of old Rs 500 and Rs 1,000 notes into gold, then gold imports should have picked up in December 2016 and January 2017, but they haven't. They are considerably lower in comparison to December 2015 and January 2016. This basically puts the gold theory out of the window.

The other theory offered in explanation to private consumption expenditure going up has been that people bought a lot of iPhones after demonetisation was announced. How can the sale of one product push up GDP numbers is beyond my comprehension, but I will not get into that. While Apples sales did go up in October (pre-demonetisation) and November (eight days with no demonetisation), the sales crashed in December because of lack of cash in the financial system.

As a newsreport in The Economic Times points out: "After a cracker of sales in October-November, which heralded strong growth for that quarter, purchases of iPhones dwindled mainly because of the lack of cash, which had fuelled buying before demonetisation. That's forced Apple to scale down its India revenue target to $2 billion for its fiscal year (October 2016-September 2017) from $3 billion."

Also, the sales of many consumer goods companies fell during the period. (You can read about it here).

Essentially what all this tells us is that it is very difficult to believe that private consumption expenditure grew by 10.1 per cent during October to December 2016, despite demonetisation. There is something that clearly does not add up here. In fact, take a look at Figure 6. It shows what portion of the GDP is made up by private consumption expenditure.

Figure 6

As can be seen from Figure 6, the private consumption expenditure share in GDP is at very high levels. Also, the kind of jump seen between the period of three months ending September 2016 and the period of three months ending December 2016, has never been seen before.

And given that private consumption expenditure forms a bulk of the GDP, all in all, this tells us that there is something that just doesn't smell right about India growing by 7 per cent in October to December 2016, when the currency situation was very tight.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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19 Responses to "Believe in Indian GDP Growth at Your Own Peril"


Mar 6, 2017

Thanks for an aptly titled article. All figures released by the present govt need to be double checked. Fin Min gives out incorrect numbers so does the Power Min. RBI still not through with counting all the demonetised notes..effect on informal sector still not factored in - but hardwork apparetly trumps Havard degrees!



Mar 3, 2017

They have turned the debate from very weak economy to whether GDP numbers are correct or not. Very smart. Global growth is very low. Exports are falling. Bank stressed assets rising and already highest among major economies. Very weak credit growth and economy is showing excellent performance without bank credit growth. Wow!!!!


R Varadarajan

Mar 2, 2017

I am reminded of the apt description for statistics " Lies, Damn lies and Statistics" !!!!



Mar 2, 2017

please use your energy for some thing useful. postmortem of past incidence and more and more theoretical economic does nothing.

Like (3)

Ravindra Kango

Mar 1, 2017

One possibility is that after a standstill in the first 2-3 weeks of NoteBandi, a large number of consumers and their vendors switched to cheques and electronic payment like online shopping, card payments, Mobile payment wallets, etc. This is evident from the manifold surge recorded in e-payment transactions after the NoteBandi. So lot of pending transactions might have been executed later on by end of December 2016 using non-cash options and captured in the systems. Hence it should not be surprising if they reflect in the fresh GDP data. Afterall the 'Business As Usual' can't stop beyond few days, whatever be the hurdles. People do find some way out and the show will go on.

I believe a significant portion of unaccounted, out-of-system cash transactions including the informal industries have entered - rather forced to into the formal,legal channels due to the sudden cash crunch and given little choices and time.

Having said that, I think now the total cash volume required in circulation must have decreased. That may be the reason the entire volume of banned notes may not be replaced with new notes. Accordingly the restrictions on cash withdrawals, therefore, are almost gone now. In my view the people of India and Bharat seem to have adapted themselves. Initially there were hardships to most people, incidents of clashes between the public waiting in queues and the bank staff but overall it went through peacefully without any violent reactions anywhere and in democratic way. The bank employees who go on strike for trivial demands, rose to the need of the hour and managed it with no previous experience of this kind.

Sometimes you need to act harsh,tough and strike surgical even in democracy for better things. In India, the mindset of business communities, professionals and people in general is to make money but hide it and escape tracking and paying taxes to the extent possible. That explains why during last decade or so, although the economy has certainly grown noticeably but the tax collection is not rising in proportion to the high increase in turnover of consumer goods, automobiles, luxary accessories and gadgets, jewellery, kitchen wares, furnishing, housing; Utilities like electricity and fuels, services like education, medical, legal, accounting, architecture and interiors, hotels, restaurants, transport and tourism, entertainment, etc. In this situation you can't keep persuading and wait indefinite time for people to go legal.

NoteBandi was not the once-for-all and only solution but one of the measures to break the ever-rising menace of parallel unaccounted money funding the anti-social, anti-national activities. We can expect many other measures following.

Like (4)

Arunabha Das

Mar 1, 2017

30%_of the cash in the system that was not supposed to return (black money) returned to the system. Only when this money leaves the system can gold be imported. This money is now stuck in the banks. Demonetisation did lead to purchase of gold. That is evidenced.

Like (4)

Eutropio Peris

Mar 1, 2017

During the demoitisation phase I saw some outlets who were accepting the demonetised notes. Outlets like pharmacies,Mother dairy outlets and people were buying medicines for the family for months in advance.since the pharmacies also stock toiletries,these were bought in bulk and products that were slow moving were all sold out..People also bought large stocks of non vegetable and fruit which are stocked by the Mother Dairy Outlets
Where ever there was an opportunity to use the demonitised notes ,people got rid of the notes and this may have reflected in the consumption.
The consumption figures need to be analysed further.

Like (4)


Mar 1, 2017

Taking that the growth figure put out by MOSPI is correct with a pinch of salt, I believe that India lost biggest opportunity of posting still bigger growth more than 7% due to notebandhi. It could have been even 7.5% if cash crush was not there during Nov and Dec.

Instead of saying that demonetization had not effected the growth, I trust that India had put very good performance if the figures given by government are correct inspite of demonetization.

Like (1)

Chetan Maru

Mar 1, 2017

I am also surprised and shocked, that the figures presented aren't correct, its doubtful figures, under no circumstances, its possible, because when daily wages labours did not have any work no income how can other side rich peoples gone on shopping, i haven't seen any retailers full rush during last two months of oct-dec.
Even Prime Minister speech in its post demonetisation speech had condemn the country for passing a tough task. so i dont accept it.

Like (1)

Yudhvir Talwar

Mar 1, 2017

It is true that lot of people purchased consumption items with the the cash held by them in Rs 500 & 1000/ notes but this was a short lived phenomena. We do know that overall consumption was down as indicated by automobile sales and various others, bank credit had nose dived and informal sector was in distress. In month of December I had gone to a local shoe shop to buy golf shoe made in Agra. However the shopkeeper informed that Agra golf shoe maker who had a small unit, had closed down due to demonetization. I found car repair shop without any customers during the period. Informal sector was badly hit and there are many more stories relating to distress. I find the figures released by CSO be completely unrealistic if not deceitful. We expected better application of mind by CSO and avoided becoming part of political-economical propaganda.

Like (1)
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