Growth to be below 7.1% estimate, say economists

Economists’ are sceptical about the Central Statistics Office’s 2016-17 advance estimate of 7.1 per cent GDP growth, with some contending that the deceleration forecast in economic activity is possibly understated even without accounting for effects of demonetisation.

They see downside risk of at least 20-30 basis points to the CSO’s annual GDP estimate for 2016-17, with the second reading out on February 28 and final on May 30.

The CSO had on Friday pegged the 2016-17 real GDP growth at 7.1 per cent, much lower than the 7.6 per cent GDP growth recorded in 2015-16.

Anis Chakravarty, Lead Economist, Deloitte India, said that the decline in economic activity itself is possibly underestimated on account of timing and methodology issues.

“Overall, the current set of numbers show a sobering picture of the economy. We would expect full year numbers to possibly print in below the estimate. That said, while we remain cautious, the activity levels should see normalisation by second quarter of 2017-18”, he said..

Stating that the CSO’s advance estimates are “unsurprising”, Aditi Nayar, Principal Economist, ICRA, said that the rating agency expects 2016-17 GDP and Gross Value Added (GVA) growth at 6.8 per cent and 6.6 per cent, appreciably lower than the advance estimates.

“Given the unfolding trends, we expect actual 2016-17 growth to be lower than the Advance Estimates for sub-sectors such as manufacturing, agriculture, electricity and construction,” Nayar said.

Meanwhile, Citi India Economic Research has in a new report –‘2017 Outlook: Repair, Reform and Rebound’ – released on Monday lowered its India GDP growth forecast for 2016-17 to 6.8 per cent from its previous forecast of 7.2 per cent. However, the report expects GDP growth to recover to 7.5 per cent in 2017-18 on a lower base and on the assumption of no structural damage to the economy.

Almost two months after the demonetisation decision was announced, there are early indications of the negative shock to growth, the Citi report said.

Singapore-headquartered DBS Bank Ltd said in a research note (DBS Group Research) that the annual GDP estimate is likely to be taken with a “pinch of salt”. The advance estimate numbers factor in data until October/November 2016 and extrapolate the trends, not completely factoring in impact of banknote ban.

“We see downside risks of at least 20-30 basis points to these advance estimates”, the DBS research note said.

Also, it has highlighted that the CSO has pegged the nominal GDP growth for 2016-17 at 11.9 per cent, higher than the 11 per cent assumed in the Budget, giving a lift to fiscal targets (expressed as a percentage of nominal GDP). GDP deflator is estimated at 4.8 per cent in 2016-17, higher than 1.1 per cent in 2015-16.

“With a return to normalisation likely in 2017-18 and firm GDP deflators, nominal GDP is likely to receive a lift. This will provide more fiscal room to the government even as they keep within targets”, DBS research note said.

Meanwhile, HSBC Global Research said in a new research note that it expect 2016-17 GDP to come in at 6.3 per cent, lower than 7.6 per cent recorded in the last fiscal, as demonetisation slows activity in the second half of the fiscal year.

The CSO’s advance estimate of 7.1 per cent GDP growth for 2016-17 does not include the impact of demonetisation, and is therefore likely to be largely ignored by markets and even the Finance Ministry for its Budget making exercise, it added.

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