Illustration: Peter C. Espina/GT
India's GDP numbers continue to be debated for their veracity and credibility for the last year. Since Modi's government decided to change the base year, economists, broking houses and credit rating agencies have continued to treat the macro economic data emanating from the country with suspicion. Recent numbers painting a rather healthy picture of the economy post-demonetization have again raised questions about GDP numbers.
India defied expectations by retaining the title of the world's fastest growing major economy after its GDP growth came in at a robust 7 percent for the October-December quarter of 2016, despite New Delhi's cash crackdown. Economists and analysts in a Reuters poll had predicted a much lower GDP of 6.4 percent.
Prime Minister Narendra Modi made a decision in November last year to rid old 500 and 1,000 rupee notes, scrapping 86 percent of the cash in circulation almost overnight. The move - aimed at fighting tax evasion and corruption - left small businesses across the country in disarray as the cash crunch meant customers were only buying essentials. The demonetization was expected to take a toll on the country's economy. Little surprise then as to why recent robust GDP figures have left economists dazed and have raised fresh doubts about the quality of India's official economic data reporting.
This number looks somewhat surprising, as real activity data released since the demonetization pointed to weak consumption and services activity, two sectors where transactions are cash intensive. By contrast, official data suggest that private consumption was strong in the fourth quarter of 2016 (though services output growth was moderated quite substantially).
However, this is not backed up by the earnings of consumer goods firms in the last quarter. As cash-strapped households turned wary of buying, sales of various goods from beverages to domestic appliances to cars plunged. The lackluster consumer spending prompted several companies to trim their revenue outlook.
Consumer confidence has also dropped due to uncertainty stemming from the demonetization move, according to a Reserve Bank of India (RBI) survey published recently.
On this discrepancy, experts believe it could be the inability of official data to capture the negative effects of demonetization on the informal sector. However, the formal sector remained surprisingly robust. This raises the possibility that these initial estimates of the growth impact of demonetization could well be underestimated, with the possibility of revisions to official GDP data later on.
Modi had received flak for his shock monetary therapy from political opponents as well as prominent economists. Anecdotal evidence suggested massive job losses following the cash crunch in India's vast informal sector, which not only supports the formal sector but also employs nine out of 10 workers. The government as well as the RBI, however, maintained that the pain would be short-lived and predicted a sharp economic rebound. The latest GDP data vindicates their assessment.
India's GDP was also higher than China's 6.8 percent growth for the last three months of 2016. Global rating agency Fitch expects India's GDP to grow by 7.1 percent for 2016-17, before picking up to 7.7 percent in both 2017-18 and 2018-19. This is in line with assessments by other experts who expect India to remain the world's fastest growing major economy.
According to a World Bank article, India is a part of the South Asia growth hotspot. Specifically, India's GDP growth will remain strong, "supported by expectations of a rebound in agriculture, civil service pay reforms, increasingly positive contributions from exports and a recovery of private investment in the medium term. However, India faces the challenge of further accelerating the responsiveness of poverty reduction to growth, promoting inclusion and extending gains to a broader range of human development outcomes related to health, nutrition, education and gender" the article noted.
Perhaps, India can learn from China's experiences. China has mapped out a plan to improve the economy, standard of living and environmental conditions in its western regions by 2020. The less-developed west presents huge potential for development. Specific targets include sustained and healthy economic development, stronger innovation, more progress in industrial upgrading and infrastructure construction as well as better environmental and public services. The Chinese government is working to build a moderately prosperous society in the west of the country by 2020 by linking it with the One Belt, One Road initiative.
The author is a Shanghai-based business commentator. firstname.lastname@example.org