India's GDP growth appears 'too good to be true'
Ruling-party sources pile on doubt, driven by demonetization woes
YUJI KURONUMA, Nikkei staff writer
NEW DELHI -- India's robust official growth figures are being questioned even by some related to the country's ruling party, as they appear too inconsistent with the sluggish consumption following last year's demonetization.
The Central Statistics Office said Tuesday that India's gross domestic product grew 7% on the year for the October-December quarter. Though below the 7.4% rise for July-September, the figure is far better than most had expected: Markets had priced in growth in the lower 6% range. Even the Finance Ministry had pegged growth for the current fiscal year ending March 31 at 6.5% to 6.75% in a white paper released at the end of January.
Reporters had a hard time swallowing the numbers at a news conference following the official release. One asked whether the impact of New Delhi's decision in November to outlaw old 500-rupee and 1,000-rupee notes "is still not captured in numbers."
"Can we understand that the demonetization" has no impact on GDP "at all?" another chimed in.
Chief Statistician T.C.A. Anant responded that though "policies like the demonetization are very difficult to assess," the GDP figures certainly factor in "the immediate effect based on currently available data." The agriculture and mining sectors performed better in October-December than during the previous two quarters, he said.
"I am not here to defend policy or attack policy," Anant said, unbidden, at the end of his remarks. "I am only obliged to put the numbers as they come out."
The numbers covering internal demand -- the combination of consumer spending and investment -- have drawn particular skepticism. The official figures say private consumption grew 10% in the October-December period, or double the 5% for July-September. This would be the first double-digit growth under Prime Minister Narendra Modi, and would have occurred despite some 86% of India's cash in circulation having become suddenly unusable on Nov. 9.
The demonetization created chaos in India's economy, as 70-80% of payments are settled in cash. Personal consumption is said to have suffered the most.
India has long calculated GDP based on production by various industries, and only recently began releasing expenditure-based GDP calculations. It is thus well known that accuracy still leaves something to be desired. But even allowing for that, macro spending figures stand starkly at odds with more micro-scale indicators. For example, passenger-car sales volume climbed a meager 1% on the year for October-December, down from 18% growth a quarter earlier.
The demonetization shows up in other sectors as well. Domestic sales volume at Hindustan Unilever, India's largest maker of personal-care products such as soaps and shampoos, fell 4% for October-December and just 1% for July-September. Even tractor sales to farmers flush with cash after a healthy rainy season were weaker: Volume rose 18% in October-December, compared with a 28% gain the quarter prior.
The labor market also likely suffered more than GDP figures show. Long lines formed in front of banks as people waited to swap their old cash for new. Many returned to banks again and again due to exchange limits. This reporter, who had interactions with nearly 100 residents of cities and rural areas, heard many of them made four to seven bank visits, on average, over the November-December period.
Missing four days of work to wait in line would mean a 5% drop in days worked during the quarter. A 5% dip in labor input for the period, if generalized over the economy, provides little fodder for heavy GDP growth.
"We were expecting the economy [could] possibly contract during the October-December quarter," a person related to the ruling Bharatiya Janata Party versed in economic matters told The Nikkei on Tuesday night. He had sketched out a "U-shaped recovery" entailing a dip in growth followed by a rapid rebound during the January-March quarter, he said.
But "the third-quarter GDP number is just too good to be true," and it "raises doubts about the data, as the supporting indicators are weak," this person said. An examination will be conducted to look into exactly how the 7% figure was reached, he said.
The statistics office apparently declined to produce a GDP report more in line with what microeconomic indicators suggest to be true, choosing instead to, as Anant said, "put the numbers as they come out."
The goal of demonetization -- to bring illegal funds out into the open -- was a lofty one. But to the day workers who lost their jobs, the retailers whose sales plunged by half or the Indians who could not get hold of cash for food as a result, whether the economy grew 6% or 7% is immaterial. Any sign that the GDP figures were inflated at the instruction of the prime minister's administration could leave a lasting stain.