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I Don't Believe India's 7% GDP Growth Rate - Not With Demonetisation I Don't

This article is more than 7 years old.

India has reported GDP growth of 7% for the December quarter. That's just not a number I believe I'm afraid, not when we try to consider the effects of demonetisation. Of course, whether I believe something or not doesn't have all that much effect upon reality but it's still just not a number I'm inclined to believe. Do note though, this is not an accusation that anyone is lying or obfuscating. Rather, it's likely to stem from the manner in which GDP figures aren't in fact all that accurate, aren't particularly good statistics, and this is a problem especially prominent in India.

The point being that while it's certainly possible for these numbers to be true when the statistics start to contradict theory we've got to consider which is correct, that snapshot of reality or not:

India defied expectations on Tuesday to retain the title of the world's fastest growing major economy, despite the pain caused by Prime Minister Narendra Modi's shock crackdown on cash.

Annual gross domestic product (GDP) growth for the October-December period came in at 7.0 per cent, a tad slower than 7.4 per cent in the previous quarter but much faster than the 6.4 per cent expansion forecast by economists in a Reuters poll.

Absent demonetisation none of us would have a problem in accepting that number. After all, the usually best economic prediction is a straight line continuation of what is already happening. So, we'd expect a quarterly GDP number to be about what it had been the quarter before. But then there is that demonetisation to consider:

Economists are scratching their heads its almost seen for the economy is untouched by demonetisation now you are one of the strongest defendant of demonetisation. Would you agree that the economy was almost left untouched by demonetisation some pain was warranted was it not?
Shaktikanta Das: As we have explained earlier, we have to go by real statistics. Now, when the Q2 figures where the second quarter figures for the current year released the advanced estimates were released that time also we had explained that we have to go by real statistics and not by anecdotal evidence.

Pointing to these numbers and saying well, these are the real statistics, doesn't really work to my mind.

India shocked expectations on Tuesday by posting faster-than-expected economic growth in the December quarter, despite a move that drained cash from consumers during the period as the government swapped old currency notes for new.

The discomfort, and it's not really much more than that, with this number of 7% is that we really are pretty sure that demonetisation should produce a downward blip in GDP growth. We think that it's going to be beneficial in the medium to longer term but that chaos of half the country lining up outside the banks for weeks we do expect to have had an effect. And yet it's not here in our numbers. At which point we could declare that the theory that there should have been a disturbance was wrong or that we don't think these numbers are correct. Myself I think that the numbers aren't correct.

As at the top, this is not because I think that any shenanigans are being pulled. But there are limitations to the way that we collect GDP statistics. We are not, absolutely not, adding up every transaction in the economy. We are sampling instead, something which is as accurate as we can make it but no more than that. Further, our sampling quite naturally takes place in the registered and tax paying economy. Because that's the part where the government has the information about what is happening. Yes, obviously, from such sampling we then make predictions about what is happening in the un-registered and untaxed part of the economy, but they are well informed guesses, not hard facts. And then there's the thing we know about the Indian economy - by far the majority of it is off in that un-registered and untaxed part. This is what demonetisation was about after all.

Allied with this is that we would expect the cash ban to have a much greater effect upon that un-registered economy than we would one the licit, taxpaying and bank account using one. So, to piece this altogether. The slowdown effect of demonetisation would have been on the cash using economy. Our GDP statistics of the cash using economy are based upon predicted correlations between the bank account using one and that cash economy. And if demonetisation had little effect on the licit economy then using the old predicted correlations will leave us recording no effect upon the cash economy.

The end result of all of this is that I don't really believe this 7% rise in GDP this quarter past. Not because of any nefarity but just because of the limitations of our GDP statistics.