GDP Data Conundrum

Even as the official Economic Survey admits that demonetisation has at least short-term risks due to currency swap-induced monetary contraction, the recent GDP estimates of Central Statistical Organization (CSO) claim that the economic growth momentum is sustained despite the note ban.

The demonetisation created conditions of artificial recession due to demand strangulation which was the result of cash crunch. But, the CSO has estimated India’s Gross Domestic Product (GDP) growth for October-December 2016 at 7 per cent in its second advanced estimates. These figures are quoted to pooh-pooh the critics of demonetisation.

While the negative impact of demonetisation on several sectors is palpable, the government statistics claiming otherwise is perplexing. Economics is engineered to serve a political project. Why these estimates failed to capture the impact of demonetisation?

Even the Chief Statistician of India, T C A Anant, has said that results of one quarter are inadequate to judge the impact of a policy.

Quarterly GDP estimates are not based on quarterly primary data on output and consumption. Quarterly estimates are derived from annual estimates based on some advanced information and assumption as quarterly primary data is not available to ensure accurate estimation. Experts state that quarterly estimates of GDP are extrapolations of annual series of GDP. Therefore, it is wrong to make conclusive assumptions on policy impact based on quarterly data due to methodological inadequacies.

Comparison of advanced estimates with the final estimates for the previous year is generally inaccurate as successive estimates of CSO result in downward revisions in growth rates. The Chief Economic Advisor to State Bank of India, Soumya Kanti Ghosh, pointed out that the Q3 of 2016-17 reported higher growth rate because the base upon which this growth rate is calculated (Q3 of 2015-16) was revised downwards. This downward revision now is mysterious.

Therefore, claims of higher growth despite note ban are at present hypothetic. More conclusive data is needed to verify the veracity of claims or counter claims. The advanced estimates use the data for formal sector as a surrogate for the informal sector making the data vulnerable to misrepresentation of ground reality. Political claims based on advanced estimates ignoring this inherent limitation are shortsighted.

The GDP is estimated not on the basis of value-added figures taken from the producing units but from company balance sheet data. Thus the informal sector gets a lower coverage as the units in it are not listed as companies. The informal sector was the most hit due to demonetisation.

The former Chief Statistician of the Government of India, Pronab Sen, observed that the GDP estimates at market prices are arrived at by adding net indirect taxes to the gross value. The tax collection during the demonetisation registered a rise as the higher payments in trade channels were made in demonetised currency notes.

The Q3 GDP growth rate would be much lower if base rate was not revised downwards, the informal sector is adequately represented and the unusual level of indirect tax collection is taken into consideration.As the British statistician who taught at London School of Economics, Arthur Bowley, stated, the most significant facts of social life cannot be exactly quantified, but, they can be directly observed.