Being the fastest-growing large economy in the world is India’s destiny, and even the most poorly conceived economic policy imaginable can’t stop destiny. At least, that is, if you believe the government’s statisticians, who said on Tuesday that India’s GDP grew at 7 per cent in the very quarter that the government withdrew high-value currency notes from circulation.
Is India becoming another China, with incredible growth momentum and statistics nobody quite believes? One hopes not. But the government should be careful to see the new numbers for what they are -- and aren’t.
To say the data is startling is an understatement. The IMF had predicted that India would grow at around 6 per cent in the half-year after “demonetisation,” as it’s called. Most independent economists forecast GDP growth would come in somewhere between 6 and 7 per cent. Those economists naturally assumed that withdrawing 86 per cent of the country’s currency and reducing access to bank accounts would dampen private consumption.
Yet if one believes the government’s numbers, taking away most of India’s cash overnight didn’t hurt private spending at all. In fact, private consumption rose by 10.1 per cent over the quarter. That’s the highest growth in spending in over five years, and it came at a time when consumer confidence was falling sharply.
That’s right: The best stimulus, according to India’s GDP data, is taking away people’s money. I’m not sure why the government isn’t planning to do it every quarter. After all, the new GDP release also predicts that giving cash back to people will reduce private consumption expenditure growth. From over 10 per cent between October and December, when the government took the currency away, growth in private spending is supposed to fall to 6.4 per cent between January and March, when they’re busy giving it back.
Other data is equally puzzling. Bank credit growth fell to a decades-long low in December. Yet somehow investment -- which in India is dependent on bank finance -- reversed direction sharply. After three quarters of accelerating decline -- down 1.9 per cent, 3.1 per cent and then 5.6 per cent -- it grew at 3.5 per cent precisely when every bank employee was stocking ATMs instead of handing out loans. The data says manufacturing grew at 8.3 per cent in the quarter, even though an index of manufacturing production produced by the same government statisticians said it shrank 2 per cent in December.
On the other hand, using alternate measures to judge the pace of growth, as Chinese Premier Li Keqiang famously did when he doubted his own GDP numbers, does provide some reassurance. Rail freight and power generation -- two of Li’s main indicators -- were both up.
And there may be reasonable explanations for some of these anomalies. After two bad monsoons, India finally enjoyed a good one last year, which tends to drive up demand and growth. Companies may have delayed cutting production after the note ban; there’s some evidence that inventories were allowed to build up first. So the impact on manufacturing may not be apparent yet.
Demonetisation also hit the rich least, which may have propped up corporate revenues and thus growth. India’s largest car company, Maruti Suzuki, showed only a 3.5 per cent increase in sales volume last quarter, but a 12 per cent increase in revenue. Bigger cars sold more; two-wheelers sold less. And some sectors, like steel, have seen more than 20 per cent increases in revenue following the imposition of tariffs on Chinese imports.
An even deeper divide runs between the informal and formal economy. The formal economy is what the statisticians can easily measure. But perhaps half of India’s output comes from the informal sector, one of the highest proportions in the world. The informal economy depends more on cash and was hit harder. The GDP numbers thus don’t catch the full effect of demonetisation. Look out for “revised” estimates six months from now, when formal-economy indicators begin to reflect informal-economy reality.
Till then, India’s government would be wise to take its own numbers with a grain of salt. As many questions should be aired within the government as are being raised outside. - Bloomberg View