CSO's GDP growth estimates for Q3 misleading

Do not reflect true picture of consumption demand

by Manasi Swamy

The Central Statistics Office (CSO), in its latest data release, pegged India’s GDP growth for the October-December 2016 quarter at seven per cent. Although a little weaker than the first two quarters of the fiscal, the growth has overshot popular expectations with a good margin. 30 economists polled by Reuters had projected GDP growth to drop to a three-year low of 6.4 per cent in the December 2016 quarter, with some fearing it to be even below 6 per cent.

The seven per cent GDP growth for the December 2016 quarter rests on the overwhelmingly high estimates of private final consumption expenditure (PFCE) growth for the period. The CSO has estimated PFCE to have grown by 10.1 per cent in the December 2016 quarter, its fastest pace since September 2002. This means that the CSO believes that the growth in consumption demand actually accelerated post demonetisation instead of slowing down.

Now, the question is "Are these PFCE estimates correct?" Mathematically, these may or may not be correct. But, they certainly do not reflect the true picture of consumption demand during the October-December 2016 period.

The prime reason behind the CSO’s extraordinarily high estimate of PFCE for the December 2016 quarter is its computation method. The CSO computes PFCE by using the commodity flow approach. It works PFCE by subtracting intermediate consumption in agriculture, manufacturing and other industries, stock variations, consumption on government account and gross fixed capital formation from total availability of output. Availability, particularly for supply-driven industries, is subject to vagaries of nature and so is PFCE.

With a bumper production of foodgrains this year, the food & beverages component of PFCE is likely to have reported a stunning growth, thus pulling up the growth in entire PFCE for the December 2016 quarter. Food & beverages account for a third of India’s PFCE.

Thus, the growth in PFCE in the third quarter appears more supply-driven than an indication of a pick-up in demand.

There are at least five reasons to belive that consumption demand must have taken a hit post demonetisation.

  1. Arrivals of paddy, arhar, groundnut, fruits and vegetables in the mandis dropped (y-o-y) post demonetisation. If supply of these commodities in the market was lower, then their consumption is unlikely to have shown an impressive growth during October-December 2016.
  2. Aggregate sales revenues of the listed domestic appliances (-15.8 per cent), cosmetics, toiletries, soap & detergents (- 2 per cent), textiles (- 3.5 per cent) and food processing (- 1.8 per cent) companies declined year-on-year during October-December 2016. Even big festivals like Diwali, Christmas and the wedding season could not lift their performance.
  3. Domestic sales of automobiles, that were growing steadily for 10 months till November 2016, started shrinking after demonetisation. According to the data released by the Society of Indian Automobile Manufacturers (SIAM), automobile sales declined y-o-y by 5.5 per cent in November, 18.7 per cent in December and 4.7 per cent in January.
  4. The Nikkei India Services Purchasing Managers’ Index had dropped to a 3-year low following demonetisation and had remained around the same level in December. The Nikkei Manufacturing Purchasing Managers Index had also reported a fall in December 2016.
  5. People’s sentiments about prevailing economic conditions and employment, household income and spending deteriorated in the December 2016 quarter, as per RBI’s Consumer Confidence Survey. Business sentiments (assessment of the current scenario and expectations of the future) also fell during the December 2016 quarter, as per the Industrial Outlook Survey conducted by the RBI.

CMIE STATISTICS
Unemployment Rate
Per cent
3.7 -0.0
Consumer Sentiments Index
Base September-December 2015
99.5 +0.2
Consumer Expectations Index
Base September-December 2015
100.0 0.0
Current Economic Conditions Index
Base September-December 2015
98.7 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Jun 16 Sep 16 Dec 16 Mar 17
New projects 1.45 2.40 1.40 2.87
Completed projects 0.90 2.20 0.88 1.65
Stalled projects 1.40 0.64 1.01 0.32
Revived projects 0.40 0.51 0.17 0.62
Implementation stalled projects 0.50 0.37 0.80 0.27
Updated on: 23 May 2017 8:20PM
Quarterly Financials of Listed Companies
(% change) Jun 16 Sep 16 Dec 16 Mar 17
All listed Companies
 Income -0.9 2.1 6.3 10.3
 Expenses -0.3 1.9 6.6 9.5
 Net profit -4.0 14.6 37.8 37.5
 PAT margin (%) 6.9 6.9 6.1 7.3
 Count of Cos. 4,499 4,479 4,449 1,114
Non-financial Companies
 Income -2.5 0.6 6.1 12.7
 Expenses -2.9 -0.2 7.6 17.3
 Net profit 9.7 26.7 22.2 -7.0
 PAT margin (%) 7.4 6.9 6.2 10.0
 Net fixed assets -9.2 8.0
 Current assets 8.1 5.1
 Current liabilities 11.6 7.7
 Borrowings 3.1 7.1
 Reserves & surplus 8.4 12.7
 Count of Cos. 3,502 3,485 3,468 884
Numbers are net of P&E
Updated on: 23 May 2017 8:29PM
Annual Financials of All Companies
(% change) FY13 FY14 FY15 FY16
All Companies
 Income 12.4 9.9 4.9 1.0
 Expenses 12.6 9.7 5.0 1.1
 Net profit 1.2 -3.1 2.1 -12.4
 PAT margin (%) 3.6 3.2 3.2 3.1
 Assets 14.3 12.2 9.3 8.1
 Net worth 9.5 9.6 8.6 7.4
 RONW (%) 6.8 6.1 6.1 5.5
 Count of Cos. 24,399 21,813 20,887 16,947
Non-financial Companies
 Income 11.7 9.6 4.0 0.0
 Expenses 12.0 9.2 4.1 -0.8
 Net profit -8.4 -3.8 -4.0 12.5
 PAT margin (%) 2.4 2.2 2.2 2.8
 Net fixed assets 12.9 11.6 13.0 12.4
 Net worth 7.7 8.6 7.2 6.7
 RONW (%) 5.5 5.0 4.9 5.8
 Debt / Equity (times) 1.1 1.1 1.1 1.0
 Interest cover (times) 2.1 1.9 1.9 2.1
 Net working capital cycle (days) 72 69 67 66
 Count of Cos. 18,910 17,264 16,595 13,776
Numbers are net of P&E
Updated on: 21 May 2017 10:44AM