India: Growth defies expectations in Q3 FY 2016; remains strong despite demonetization
February 28, 2017
The government’s demonetization program barely dented India’s economic momentum in Q3 FY 2016, according to recently released data by the Ministry of Statistics and Programme Implementation (MOSPI). GDP expanded a healthy 7.0% annually in the October to December period, below the 7.4% expansion reported in the previous quarter, but nearly a full percentage point above market expectations. Double-digit increases in private and government consumption managed to keep growth robust, however, it is uncertain if the figures capture the full on-the-ground picture of the economy. Along with the quarterly result, MOSPI released an advance estimate for GDP growth for FY 2016. The economy is expected to grow 7.1%, down from the previous year’s 7.9% expansion. Despite the deceleration, India remains one of the fastest growing economies in Asia.
Looking at the details of the quarterly result, private consumption was the main economic engine, picking up from 5.1% growth in Q2 to 10.1% in Q3. Despite the cash crunch, households continued to spend, aided by a good monsoon season and public pay hikes. The demonetization likely caused households without banking access to accelerate purchases. Government spending was solid, expanding at a double digit pace (Q3 FY 2016: +19.9% year-on-year; Q2 FY 2016: +15.2% yoy). Improved government accounts and lower interest rates helped boost public expenditure. In addition, fixed investment rebounded from Q2’s contraction, growing 3.5%, but remained weak.
The external sector’s performance deteriorated, subtracting 0.2 percentage points from growth. Imports grew a strong 4.5%, reflecting the strength of domestic demand and a rise in energy prices towards the end of the period. Exports of goods and services rebounded, growing 3.4% after a 0.9% decrease in Q2 as external demand picked up steam.
Overall, the GDP data conflicts the picture painted by high-frequency indicators throughout the quarter. The manufacturing and services PMIs fell into contractionary territory and other indicators pointed to muted activity in Q3. Part of this discrepancy is likely due to the fact that GDP calculations do not capture the full impact of the informal economy, which is large in India and was probably hit hard by the cash crunch. In addition, Q4 FY 2015’s GDP growth was revised down, creating a positive base effect. Despite these partial explanations, the numbers still appear at odds with reality. Doubt over the reliability of India’s GDP data has existed since the government changed their methodology in 2015 and this has been exacerbated by the recent discrepancy in figures.
A number of our analysts believe that the Q3 GDP numbers are too optimistic and could be revised when more complete data is available. Shashank Mendiratta, Economist South & Southeast Asia at ANZ adds:
“India’s FY2016 GDP estimate of 7.1% was higher than our as well as market estimates. […] Based on this estimate, the quarter ending March is expected to grow by 6.8% y/y. Prima facie; this looks surprising given that the December-2016 quarter was expected to bear the brunt of the banknote reform. We believe the GDP numbers are poised for a downward revision when the government releases revised numbers in May 2017.”
In line with ANZ’s view, Anubhuti Sahay, Head of South Asia Economist Research at Standard Chartered states:
“In spite of better-then-expected Q3-FY16 GVA and FY16 GDP releases, we maintain our growth projections of 6.8% for FY16 and 7.2% for FY17. We expected the FY16 numbers to be revised lower as more data becomes available in May.”