The gdp maze

The gdp maze

Modi government must not neglect the economy, whatever message it puts out politically.
The latest headline number on the speed at which India grew between October and December suggests that demonetisation did not have a significant impact on economic activity. Government can thus claim the economy is fine. This conclusion is misleading. While GDP grew 7%, a rate faster than some expected, details put out by the Central Statistics Office also suggest the Indian economy has been losing steam for a year. Therefore, it is important that the Modi government continues to focus on both managing immediate economic challenges and carrying forward the process of reforms which alone can enhance long-term productivity.
India's large informal sector makes the task of calculating the level of economic activity and its year-to-year growth challenging. Consequently, numbers are revised for up to two years or more as a greater quantum of data for the informal sector becomes available with the passage of time. For example, GDP data for 2015-16 was recently revised upwards from 7.6% to 7.9%. In similar vein, given that demonetisation's negative impact would have fallen largely on cash intensive informal sectors, it is reasonable to assume there will be revisions. Even the early data shows that growth of economic activity as measured by value addition has been slowing down. For example, quarterly data on gross value added growth has been slowing down for a year, recording 6.6% in the period between October and December. This suggests that even before demonetisation the economy was being held back by challenges. A serious concern is that public sector banks are in bad shape. Reviving them may be the most important challenge finance minister Arun Jaitley faces.
A resolution to the public sector banks bad loan problem is also a prerequisite to revive private sector investment activity in the economy. This challenge requires the government to expend political capital as there is a danger of any solution becoming ensnared in populist rhetoric about crony capitalism. In addition to dealing with this critical immediate challenge, India needs considerable reform in land and labour markets, and in its regulatory architecture. It is only these reforms which will make us a more productive economy and create jobs of sufficient quality and quantity for the million young people who join the work force each month. The first estimate of third quarter GDP of 2016-17 should not make us lose track of the economy's needs.