The answer to the puzzling rise in Private Final Consumption Expenditure (PFCE) in the second advance estimate of GDP for 2016-17 despite the evident cash squeeze due to demonetisation may very well lie in the methodology used for calculating the new series of GDP. As per the methodology, since no direct data of expenditure is used, most of the GDP data is calculated based on output data, thereby resulting in a rise in inventories getting reflected in higher consumption expenditure.
Change in stocks, the term denoted for inventories in GDP calculations, is estimated to increase 17.2 per cent in 2016-17 to Rs 3,08,426 crore from Rs 2,63,071 crore last year, data released by the Central Statistics Office (CSO) showed. In the October-December quarter, however, change in stocks showed a decline of Rs 2,943 crore to Rs 73,070 crore. But, going ahead, as per the back-of-the-envelope calculations, the CSO expects inventories to rise in the January-March quarter, with change in stocks expected to rise to Rs 82,373 crore.
“There is no direct measure for expenditure side. Except for government expenditure and trade data, everything else is estimated based on production data. So, it’s possible that piling up of inventories is getting reflected as higher consumption and investment not being reflective of demand on ground,” former chief statistician of India Pronab Sen said.
CSO officials confirmed that inventories, especially food stocks, may get reflected as higher consumption expenditure. “There’s no direct data, we follow whatever is available from the production side. Commodity flow stock is recorded and we see the trend in consumption vis-a-vis production of previous years. The trend in consumption is then extrapolated to the year for which GDP data is being released. For example, for the food stocks, inventories are added to the commodity flow estimates. Total stock of food is derived for the year and then you use various ratios to arrive at quarterly data for final consumption,” an official involved in the exercise said.
Economists and officials said that the sharp rise under the ‘discrepancies’ head is also due to the same reason of equating GDP estimates from both production and expenditure approaches. For 2016-17, ‘discrepancies’ have been estimated to rise by a whopping 161 per cent to Rs 1.19 lakh crore from Rs 45,407 crore last year. The expenditure approach calculates GDP by adding Private Final Consumption Expenditure, Government Final Consumption Expenditure, Gross Fixed Capital Formation, Change in Stocks, valuables, net exports and discrepancies.
Some economists also pointed that private consumption and fixed investment is showing a rise due to a possible classification of cash in hand by companies as sales during the quarter. “Private consumption, fixed investment and industrial output growth all accelerated in October-December, with only the services sector witnessing a slowdown. This does not add up. High frequency real activity data released since demonetisation suggest that consumption and services were hit after demonetisation because they are more cash-intensive,” Nomura said in a note.
It further said, “We believe there could be three reasons for the upside surprise: (1) the inability of official statistics to capture the negative growth effects on the unorganised sectors, as the official numbers are based largely on organised sector data; (2) the GDP growth estimate for October-December 2015 was also revised lower by 0.8 percentage points to 6.5 per cent y-o-y from 7.2 per cent, thereby creating a large favourable base effect for comparison; and (3) if companies showed their cash in hand (after demonetisation) as sales, then this may be getting captured as a higher value addition in these specific sectors (as corporate data are partly used to estimate growth). In our view, official GDP statistics are significantly underestimating the growth impact of demonetisation.”
SBI Research in a report said that sectors such as diamonds, gems and jewellery, mining, realty, construction and refineries showed a rise in cash sales during the third quarter compared with the second quarter. Based on its analysis of quarterly results of listed entities, SBI Research said, “In Q3 FY17, 720 entities, had an average cash sales of Rs 24.40 crore per entity increasing from Rs 22.98 crore in Q2 FY17 per entity for 731 entities.”
Economists expect the discrepancy in GDP data to be corrected in subsequent revisions, which is likely to be a long drawn process, with final revised estimate of 2016-17 scheduled to be released early next year. “Interim corporate filings were considered for the quarterly GDP data. The annual corporate filings in the form of MCA21 data are yet to come and will get included in the GDP data only next year,” Sen said.