“The data is not a true reflection of reality in India” Interview with Société Générale India Economist
Doubts over the true growth pace of India’s economy have plagued market analysts since the government changed its GDP methodology in 2015 and were recently exacerbated by the growth figures for the October-December period. While a sharp slowdown in the October to December period was expected due to a cash crunch caused by the government’s demonetization, official figures showed that growth barely skipped a beat and the economy expanded 7.0% annually—one of the best results in the world. Against this confusing backdrop, we spoke with one of our panel members, India Economist Kunal Kumar Kundu from Société Générale, about the effects of the government’s demonetization, his take on the GDP figures and the overall picture for the economy going forward.
Kunal Kumar Kundu is the India economist at Société Générale CIB based in India, where he has been since August 2013. Kunal has more than 17 years of experience in financial research and has held a variety of roles in global finance. He started his career as a journalist with Dalal Street Investment Journal (one of India's leading investment magazines) in 1996 and has a Master's in Economics along with post-graduate diplomas in Business Management and Equity Research & Analysis.
FocusEconomics: How have your forecasts been affected by the government’s demonetization?
Kunal Kundu: Removing 86% of the currency in one fell swoop from an economy that is predominantly cash-based (approx 80% of transactions take place in cash) ought to have had an impact on India’s overall economic activity. We believe that India’s informal sector, which accounts for roughly 80% of employment and roughly 40% of GDP, is likely to have been the most affected given that the majority of transactions in this space take place in cash. Crimped demand, especially in rural areas, ensuing falling capacity utilisation and weakening business confidence ought to have resulted in a far lower growth rate than India would be comfortable with. The sharp drop in headline CPI to sub-4% corroborates our fear. We believe the currency shortage will last at least until the end of March 2017, if not later, before things eventually return to normal. As per data from the Reserve Bank of India (RBI), India could achieve remonetisation (the introduction of new currency notes in lieu of the scrapped old ones) to the extent of 60% during the three-and-a-half month period post demonetization.
According to a study by India’s largest organisation of manufacturers, the All India Manufacturers’ Organisation (AIMO), in the first 34 days following demonetisation, micro and small scale industries suffered 35% job losses and a 50% dip in revenue. The AIMO, which represents over 300,000 MSME and large-scale industries engaged in manufacturing and export activities, also projected a drop in employment of 60% and loss in revenue of 55% before March 2017. According to the study, the factors that have contributed to the impact include zero cash inflow, rules curtailing cash withdrawals, staff absenteeism, a weaker rupee, choked fundraising options, the inability of banks to work on proposals and a derailed real estate sector, among other factors.
We believe that a large number of job losses will lead to a highly stressed household sector and hence weakening consumption. Evidence suggests that investment dropped substantially in calendar 4Q16. We expect investments to remain weak or weaken even further in the current year, and this in turn will further impact the household sector. Hence we do not expect the pain to go away in two quarters but rather to continue for at least four quarters, if not more. Essentially, we believe that as the private investment recovery gets pushed back further, household stress is set to continue, leading to a negative spiral.
Click on the image above to open a full-size version
FE: What is your view on the recently released official GDP data?
KK: India’s official 3QFY17 (April 2016 to March 2017) GDP data surprised all and sundry. In fact, by suggesting a real GPD growth of 7% yoy, as compared to market expectations of 6.1% yoy, it managed to surprise every economist polled by Bloomberg (where the highest forecast was 6.9% yoy). At the disaggregated level, however, the data raises more questions than it answers as it contradicts other official data and even some high frequency data. We believe that this data, in all probability, will be revised downward.
There are multiple challenges, including poor rural wage growth and weak farm income, especially due to the trashing of perishable items by farmers on account of a fall in demand as the cash-driven supply chain came to a grinding halt. This situation ought to have resulted in weak Gross Value Added (GVA), yet GVA growth in agriculture was unusually high. Despite high and rising inventory accumulation, falling capacity utilisation and one of the weakest growth rates in personal loans during the quarter, private consumption grew by a huge 10.1% yoy. Under these circumstances, one cannot begin to comprehend a sharp growth in manufacturing.
It seems that the Indian Central Statistics Office (CSO) has not been able to collect comprehensive data from the informal sector. We believe that as more data flows in, the GDP data will need to be revised down.
FE: What is the scope and timing of any fiscal gains from demonetization?
KK: The basic assumption of demonetisation is that the informal sector activity is purely a reflection of the black economy and hence demonetization will push toward more formalisation leading to more tax revenue generation. We think that this is a fairly exaggerated expectation. While we agree that the probability of generating black income is higher in the informal sector than in the formal sector, the fact remains that not paying taxes is not the main reason why farms tend to operate in the informal sector. Onerous regulations force many farms to remain informal. Moreover, the majority of employees in this sector earn income which remains under the minimum threshold for income tax.
FE: Would you elaborate a bit more on why is black income generated and what are its sources?
KK: I see three main factors that generate black income:
- Inadequate direct tax reforms – While much discussion has taken place over the last decade, no action has been taken so far. Reforming direct tax and ensuring better intelligence will likely prove to be more effective in curbing black money than demonetisation.
- Lack of transparency in political funding – In India, the process of political funding remains very opaque and has evolved into a major end-use for black money. The recent announcement of a maximum amount of permissible cash donations will hardly have any meaningful effect unless transparency is ensured.
- Non-taxing of agriculture income tax – Agricultural income is not taxed at all in India. For a country with such a poor direct tax-to-GDP ratio, it is incomprehensible how virtually 15% of the economy remains untaxed. In fact, this has emerged as a significant conduit for tax evasion as a large chunk of income is shown as agricultural income and hence there is no incidence of tax.
FE: The RBI recently shifted its stance from accommodative to neutral, do you see any rate hikes in India’s horizon?
KK: As of now, given the official data alleging fairly high growth despite demonetisation, it seems that the RBI is done with its rate-cutting cycle. Also, a potential rate hike in the US and the recent movement of commodity prices will keep the RBI in a wait and watch mode.
FE: The government stuck to a broadly market friendly budget for FY 2017-2018 with a fiscal deficit target of 3.2% of GDP. Do you see this as achievable?
KK: Like the past few years, we think that the government will achieve the target as this is now its primary focus. Historically, we have seen the government cutting capex or resorting to accounting practices to keep the deficit in check if revenue falters. As of now, we have no reason to believe that the deficit target will be breached.
FE: What are the key risks for India’s outlook?
KK: A sharp spike in oil prices and major trade protectionism by the US.
Date: March 16, 2017
TagsTurkey Industrial Metals Commodities United States Nordic Economies Germany Inflation Banking Sector Commodities Precious Metals Commodities G7 France Vietnam Exchange Rate Russia Agricultural Commodities European Union Asia Argentina USA Sub-Saharan Africa World Bank Fed Unemployment rate Eastern Europe Japan precious metals Brazil Iran Canada Infographic Australia Panelists Oil Gold India Greece Latin America Brexit Emerging Markets Energy Commodities OPEC Venezuela UK Colombia Base Metals Commodities Investment South Africa MENA Africa Trade Ukraine Portugal Italy Euro Area Tunisia oil prices Company News Mexico IMF China Housing Market Consensus Forecast Major Economies Spain Economic Growth (GDP) Financial Sector Forex NAFTA
1 hour ago
2 hours ago
2 hours ago
3 hours ago
3 hours ago
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- Is the UK really "shackled to a corpse"?
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- Gold: The Most Precious of Metals (Part 3)
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- 2017 & 2018 Economic Outlook for the Top Oil Producing Countries
- Which countries will have the highest and lowest inflation in 2017?
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- There's no end in sight to the Venezuela crisis
- Can the peso predict the U.S. election results?
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit