India's official Q3 GDP growth data surprising: Fitch

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SME Times News Bureau | 08 Mar, 2017
American agency Fitch Ratings on Tuesday expressed surprise at the official Indian statistician's latest projection of 7 percent GDP growth in the third quarter ended December, saying it contradicted data on real services activity hit by demonetisation.

"This number looks somewhat surprising as real activity data released since demonetisation pointed to weak consumption and services activity because these transactions are cash-intensive. By contrast, official data suggest that private consumption was strong in October-December (though services output growth moderated quite substantially)," Fitch said in its latest Global Economic Outlook (GEO) report.

The rating agency said that an explanation for this discrepancy could be the inability of official data to capture the negative effect of demonetisation on the informal sector.

"However, the formal sector also remained surprisingly robust. This raises the possibility that these initial estimates of the growth impact of demonetisation could well be underestimated, with the possibility of revisions to official GDP data later on," the report said.

"Fitch now expects Indian GDP to grow by 7.1 percent for FY16-17, before picking up to 7.7 percent in both FY17-18 and FY18-19," it added.

The informal sector accounts for an estimated 45-50 percent of output in the Indian economy. This data is taken into account after a lag of one, or sometimes even two, years.

The Central Statistics Office (CSO) last week estimated that India's GDP for the third quarter ended December, at Rs 30.28 lakh crore, recorded a growth of 7 percent, compared with 7.3 percent in the previous quarter. The country had registered a GDP of Rs 28.31 lakh crore in the corresponding quarter of 2015-16.

The estimates of GDP growth for the full fiscal 2016-17, at 7.1 percent, marked a sharper fall from the 7.9 percent recorded for the fiscal 2015-16.

This appeared to fly in the face of previous private surveys documenting the disruption caused by the demonetisation of Rs 500 and Rs 1,000 rupee notes constituting 86 percent of currency in November.

Both the Reserve Bank of India (RBI) and the International Monetary Fund (IMF) have lowered India's growth estimates for the fiscal by up to 1 percent, citing the impact of demonetisation.

What surprised economists was that data for private consumption showed an increase of 10 percent during the quarter which felt the maximum impact of demonetisation.

"There are widespread doubts about the accuracy of the national accounts numbers. The unexpected strength of today's (GDP) data will do nothing to allay these concerns," Capital Economics said in a research note.

"Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 percent hike in civil servants' wages at the state level," the Fitch report said.

It projected India's retail price inflation to rise to 4.6 percent in 2017-18 and 5 percent in 2018-19, from 3.4 percent this year.

"There may still be some positive impact from the previous accommodative monetary policy stance, but the Reserve Bank of India signalled in its February meeting that its interest rate easing cycle had come to an end," it added.