Why India's 7% GDP Growth is Baffling

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The Central Statistical Office (CSO) surprised the nation when it released advanced estimates of Gross Domestic Product (GDP) growth for the October-December quarter. India's economic growth of 7% has sparked a debate on how output grew so fast at a time when the country was facing it's biggest-ever cash crunch, after demonetisation weeded out 86% of the currency notes in circulation.

Is India becoming another China, with incredible growth momentum and statistics nobody quite believes?

CSO data indicates the pace of private consumption doubled to 10.1% in Q3, which seems absurd for a country that depends heavily on cash for household expenses. That's the highest growth in spending in over five years, and it came at a time when consumer confidence was falling sharply.

The robust private consumption growth in October-December comes as a big surprise, given sales volume of major consumer companies, two-wheeler sales and others declined sharply in the quarter. Net exports contributed negatively to GDP growth after the positive contribution for the prior two consecutive quarters.

According to an article in Livemint, the other baffling statistic that India's bank credit growth continued to decelerate. Yet somehow investment which in India is dependent on bank finance reversed direction sharply. Following three consecutive quarters of contraction, investment in plant and machinery as measured by gross fixed capital formation went up 3.5% in the period of demonetisation.

Also, the data says manufacturing grew at 8.3% in the quarter, even though an index of manufacturing production produced by the same government statisticians said it shrank 2% in December.

On the other hand, we could use alternate measures to review the economic growth as Chinese Premier Li Keqiang did when he doubted his own GDP numbers. He used three different measures for evaluating his country's economy, all of which were harder to fudge: electricity consumption, volume of rail cargo, and loan disbursements. Electricity consumption and rail freight were both up during the demonetisation period.

Also, after two bad monsoons, India finally enjoyed a good one last year, which tends to drive up demand and growth. The growth in alternate channels in payments like mobile wallets boosted sales during note ban. Indirect tax revenues are being seen to have increased on the back of more transactions coming under the tax net, and higher fuel prices.

An even deeper divide runs between the informal and formal economy. The data only looks at large formal factories and ignores the informal sector completely, where the impact of demonetisation would have been felt the most and accounts for half of India's output. It is likely therefore that GDP numbers don't really capture the full effect of demonetisation.

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