business, Economy, Featured, India

Advance GDP to ignore crucial impact of demonetization: HDFC report

According to a recent report released by the economists of the HDFC bank, GDP growth for the year 2017 to be close to 6.7% yr. However, there was a structural break caused by demonetization although there it will have no impact in the upcoming GDP. The new advance estimation might not fully capture the disruption in economic activity due to demonetisation. As these estimates will be based mostly on data till October, before demonetisation kicked in, they might paint a rosier picture of the economy than the ground reality.  The advance estimate will be untouched by demonetization as it will be at best an extrapolation of data released till November. Since this is an idea for now, the advance estimate is to be revised down by a greater magnitude in subsequent revisions. According to the HDFC reports, the crucial impact of demonetization is likely to be felt only by the end of the third quarter (Q3) and in the fourth quarter (Q4).

 

In their reports the economists expect GDP growth for FY17 to stand at 6.7% with the second half coming in leaner than the first. However private consumption moderated and the fixed investment growth stagnated.

Effect on different sectors in the advance estimate is as follows:

  • Manufacturing growth is expected to experience a lower demand and stangant business due to demonetization. Albeit, the advance estimate is likely to incorporate IIP data only till November 2016, and hence will understate the fall in manufacturing GDP
  • Lead indicators, available for November have started to show a downward trend. This fall is expected to continue and be sharper in December and Q4. In November, domestic commercial vehicles recorded a decline of 11.6%yr as compared to growth of 8.6% last year. Multi-purpose vans, usually used for transportation in both rural and urban areas also declined by 7.5% in November.
  • Cement production is an indicator of construction activity in the economy. It grew by a meager 0.5%yr in November which is a good news as production had fallen by -1.7% in November 2015.
  • A downward trend in services due to demonetisation is also likely to be understated in the advance release. Foreign tourist arrivals moderated to 9.2% in November after recording double digit growth is the previous four months. Further, data for air cargo traffic recorded a decline of 0.6% yr in November as compared to 2% growth same time last year.
  • There has been a quite downward trend in service sector due to demonetisation which is also likely to go unnoticed in the advance release. Foreign tourist arrivals moderated to 9.2% in November after recording double digit growth is the previous four months. Further, data for air cargo traffic recorded a decline of 0.6% yr in November as compared to 2% growth same time last year.
Source: LiveMint

As far as the agricultural sector is concerned:

  • Production from the Kharif season is facing major downfall. Cash crunch directly resulted in lower demand and a steep drop in prices of food articles such as vegetables and fruits
  • Due to lack of cash, transportation has suffered and in many parts of the country farmers have discarded their produce. The reports further elaborated that the rural demand indicators: two wheeler sales also fell by 5.9% in November – sale of scooters was down by 1.9% and motorcycles was down by 10.2%. • Other indicator for agricultural activity – namely tractor sales fell by 13.1% yr in November as compared to average growth of 23% Y-o-Y so far this fiscal.
  • Due to downfall in rural economy despite sub-normal monsoon in India the overall GDP growth is likely to be lower than the advance estimate. Rural GDP accounts for 40% of overall GDP.

Latest Update