The first advance estimate for gross domestic product growth for 2016-’17 was released on Friday and showed a growth of 7.1%, lower than the 7.6% registered in the previous financial year. However, the estimate excluded the impact of demonetisation.

As the Central Statistical Office mentioned in its press release, sector-wise estimates are obtained by an extrapolation of indicators such as the Index of Industrial Production of the first seven months of the financial year, the financial performance of listed companies in the private corporate sector available up to the quarter ending September 2016, the first advance estimates of crop production, the accounts of the Central and state governments, and information on indicators such as sales tax, deposits and credits, passenger and freight earnings of the railways, passenger and cargo handled by civil aviation, cargo handled at major sea ports, and sales of commercial vehicles available for the first seven to eight months of the financial year.

Demonetisation-led slowdown

The government announced the demonetisation of high-value banknotes on November 8 and, therefore, the first advance estimate of GDP growth will exclude its impact on gross domestic product in the past two months.

But since November 8, demonetisation has hit demand across sectors and the impact continues to play out. “Demonetisation, while immobilising black money and fighting corruption, may lead to temporary slowdown of the economy,” President Pranab Mukherjee said in his New Year address to governors and lieutenant governors. “We all will have to be extra careful to alleviate the suffering of the poor, which might become unavoidable for the expected progress in the long term.”

There is no easy way of estimating the temporary slowdown of the economy, given that the full impact of demonetisation is still playing out. Withdrawal limits are still in place and this continues to impact transactions made in cash.

Quarterly results first test?

The first reliable measure of the impact of demonetisation on the Indian economy might be visible in the third quarterly results of companies listed in the stock exchange. These will be released in the month of January and likely continue in February. However, there are two limitations to the third-quarter results – they will only capture the impact after November 8, and they will only be for listed companies.

The larger universe of unlisted companies, especially small and medium enterprises, do not release quarterly results in the public domain. Nevertheless, the quarterly results of listed companies are still an important indicator of the impact of the government’s financial policy on GDP growth.

Demonetisation will affect almost every sector of the economy, both directly and indirectly. From banks to real estate to fast moving consumer goods and automobiles, the removal of 86% of India’s currency in circulation is bound to hit demand across sectors.

Mixed initial data

In fact, some indications are already available for the automobile sector. Sales data for December, released by listed companies on Monday, indicates that while car sales (a proxy for urban demand) seem to be recovering, two-wheelers (a proxy for rural demand) are still reflecting the impact of demonetisation.

The manufacturing and industrial sector remains grim. New investment proposals have fallen since November 9, and the Nikkei Markit India Manufacturing Purchasing Managers’ Index showed that manufacturing contracted for the first time in 2016 in December. Both indicators point to the industrial sector witnessing a slowdown following the demonetisation announcement.

The banking sector is left with a mixed bag so far. On the positive side, thanks to demonetisation, it has witnessed a surge in deposits as customers returned the cancelled banknotes. With withdrawal limits in place, most of these deposits will stay with the banks before they find their way back to the customers. Because of this surge, banks have been able to reduce their marginal cost of lending rates. However, with the industrial slump, credit growth is at a multi-decade low – 5.1% for the fortnight ended December 23.

Final impact a year later?

The Central Statistical Office follows a calendar for releasing annual estimates of gross domestic product that correspond with availability of economic data. These estimates are classified as advance, released in January and February, and provisional, released in May. All of these are then revised thrice (after the completion of 10 months, a year and 10 months, and two years and 10 months). Two years ago, one such revision famously boosted India’s GDP growth for the financial year 2013-’14 to 6.9% from an earlier estimate of 4.7%. Unfortunately, such variations in estimates also question the quality of data.

Given the ongoing slowdown, the 7.1% GDP estimate will, in all likelihood, be revised downwards in February and May, as more economic data becomes available to the Central Statistical Office. However, given the time taken to collect, collate and calculate data from every sector of the economy, it is likely that a more accurate picture of the impact of demonetisation might only be visible in the first revision to the 2016-’17 GDP in January 2018.

Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50