Q3 GDP Surprises

Have we overestimated the role of cash in India economy?

To say the least, the Q3 GDP estimates and the revised full-year estimates of GDP were a big surprise. Over the last few weeks estimates for Q3 GDP ranged from 5.6% to 6.3% while full year GDP ranged from 6.1% to 6.5%. It was therefore a pleasant surprise when the CSO announced 7% GDP growth in Q3 and an estimated 7.1% for the full year. Does it mean that the impact of the demonetization has passed uneventfully or does it mean that there is something in the figures that do not meet the eye?

Was demonetization that bad? 

The answer to this question will largely depend on whose narrative you have been listening to. If you talked to businessmen, small traders and the sections of the media, demonetization was likely to be a long-term setback for Indian business. They were pointing towards businesses like retail, FMCG, consumer finance, durables, automobile and two-wheelers that had a scary story to tell. But most analysts also missed out 3 critical things in their Q3 GDP estimates. Firstly, GDP impacted the parallel economy, which anyways was not going into the calculation of GDP. Hence the overall impact was limited. Secondly, there have been pockets like agriculture and government-driven services that have done extremely well. Lastly, the impact of remonetization and cheaper credit will lead to a sharp revival in Q4 and that could have a salutary impact on GDP in Q4.

The real story lies in the mix… 

To understand the real story of the GDP growth, you need to break up the data a little further. On the agricultural front, Rabi crop did disappoint but that was more than made up by a 10% growth in Kharif output. On the industrial front, SMEs actually posted negative growth. But that was more than made up by the organized corporate sector which benefited from lower fuel costs and a stronger INR. Services sector presents a more convoluted mix. Within the services space, government-driven services like administration, public utilities, welfare and defense have all done very well. But, services driven by private consumption have lagged. The net effect was not really worrying!

 What most of us overlooked…

Scratch the surface and this better-than-expected-GDP is hardly surprising. Most analysts seem to have missed out on 3 things. Firstly, government has done its best to mitigate the negative impact of demonetization through higher targeted spending. That is evident in the services figure. Secondly, legitimate Indian businesses which contribute to official GDP anyways adapted rapidly and were not too badly affected over a longer time frame. Cash crunch was more a myth for most Indian businesses. Lastly, easy credit post demonetization is emerging as the big trigger. It could get stronger in the months to come! ©

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