 Hello and welcome to NewsClick. Today we're going to discuss the recent GDP figures that have been released by the government to discuss that we have here with us today, Prof. Surajit Majumdar from JNM. Welcome to NewsClick. Thank you. Prof. Majumdar recently, as you know, the government has released GDP figures and the release figures show that India has grown at 7% last year. So are these figures credible? Because as you know, demonetization had quite an impact on Indian economy and these figures don't seem to reflect that. Well, there are two sets of estimates that have been given. One is for the growth that is expected for the year 2016-17, which will end on 31st March. The year isn't over yet. But this is based on data about with regard to GDP growth for the first three quarters. And what has been surprising is that these figures seem to show that demonetization has had no impact on GDP growth. So the third quarter GDP growth is no different from what was observed in the first two quarters. And therefore the full year's estimates also are more or less being the same as was made before the demonetization exercise. So this is surprising and many people have expressed this surprise for a set of reasons. Number one is that in an economy where currency is used on a significant scale for transactions, an exercise like demonetization was bound to have a disruptive effect on transactions as a result of which production and income generation activity would be disrupted. Somehow the GDP figures don't, growth figures don't seem to indicate that any such thing has happened, which would go against all economic reasoning. The second reason why this particular figure doesn't seem credible is that if you look at what is called the expenditure measure of GDP, where you measure GDP by the different items of expenditure on what is produced. Within the category of the expenditure, the highest and very high growth has been observed in the third quarter, which is the quarter where you expect where the effects of demonetization should be felt. In the third quarter, consumption expenditure, private consumption expenditure has grown by about 10% in real terms. Now that is rather surprising because you would expect demonetization and the inability of people to use the cash that they have for transactions to hit consumption expenditure significantly because that's the expenditure in which cash transactions tend to predominate. So for these two reasons, it is very surprising that the GDP figures have not been consistent with what economic reasoning would tell us should have happened. And in that sense, the figures are not very credible. However, this does not mean that the figures have been necessarily manipulated. The existing GDP series of India has been and the method used to calculate GDP has been a subject of some controversy even before demonetization. And there is an argument many people have made that the present GDP series is overestimating Indian GDP growth and not capturing what is actually happening in the economy. And perhaps this particular result that no effect of demonetization shows up in GDP growth figures is confirmation of the fact that there's a problem with the method rather than a confirmation of the fact that there's been manipulation of the data. But are there any indicators that at least give an idea to us what actually happened in the economy to the GDP? There are at least three sets of indicators that one can cite which would indicate that there was a effect of demonetization in terms of slowing down the rate of economic growth. One indicator is what has happened to bank credit. As a result of demonetization, of course, people were forced to put money into bank deposits, their cash into bank deposits because of which deposits increased, bank deposits increased and compared to the same period last year the growth in bank deposits jumped up. In the same period, however, what is the exact opposite happened with regard to bank credit, which is bank credit growth actually fell post demonetization compared to what it was before. Now what would explain that, why would bank credit fall? It is because when economic activity is disrupted borrowers are not interested in borrowing money to make. So the demand for bank credit is what has slumped. The demand for bank credit would slump if economic activity was disrupted. So at a time when banks had more supposedly money to lend if credit falls, it must be because the demand for credit was lowered. The second indicator is this that we have data about the use of cards both at for withdrawing money from ATMs as well as for usage at point of sale. We also have data for about the use of prepaid instruments like mobile wallets to make payments. Now if you look at these figures, you of course see after October in November, December and January compared to the previous year a very sharp fall in the withdrawals from ATMs because cash was not available. You do not you do see an increase in the use of cards at point of sale. You do see an increase in the use of prepaid instruments and mobile wallets, but that increase is not was not large enough to compensate for the decline in cash. And cash of course once it is used it is used repeatedly by many people in transactions. So that does not get captured by how much is actually withdrawn. So if you look at the total amount which is withdrawn plus use at point of sales plus prepaid instrument you do see a sharp drop after October in very sharp drop compared to the previous year. So that is the second indicator that there would have been a decline in expenditure in this period which the GDP data is not captured. The third indicator comes from tax revenues of the central government. The up to November the performance in terms of growth of tax revenues relative to last year was fairly good, but in December and January you see a sharp decline in the rate of growth of tax revenues. And actually the because of the decline the fiscal deficit at the end of January is already 105 percent of what was the budget estimate. So that is a third indicator when economic activity contracts you would see a tendency for revenues to decline. So there are several other indicators from which you can get a figure about what exactly is the degree of contraction but which do indicate that demonetization had a contraction effect on the economy. In the past three, four years there seems to be a tendency or a trend where the index of industrial production seems to be going down while the GDP seems to be growing at a normal rate. As we have seen now it's supposed to have grown at 7 percent. Can you shed a little light on this? As you know that there was a change, fundamental change in the method that is used to make estimates about India's GDP with the latest series when the latest series was adopted from 2011-12 as the base year which is different from the method that was used prior to that. The change in the method has been somewhat controversial and one of the descriptor are two important discrepancies that one can note in these figures. One is of course what you've referred to the fact that actually from 2011-12 if you see you have a consistent trend that while manufacturing output as measured by the index of industrial production has been stagnating the GDP in manufacturing according to the GDP series of the national account statistics seems to show a fairly robust growth performance through this period. So the two series toward the two measures of industrial production are extremely divergent and this is an exceptional situation and no one has really quite explained why you get this divergence. The second thing that you see is that most indicators while the overall GDP figure seems to be growth seems to be good when you look at the expenditures on that GDP there is only one item of expenditure which seems to have kept pace with overall GDP growth steadily and that is private consumption expenditure. Now normally consumption expenditure is a dependent expenditure depends on other things in the economy not something that autonomously grows so if you look at investment it has been stagnating if you look at government expenditure sometimes it has gone up sometimes it is not so it has not been a consistently high growth if you look at trade exports and imports they have been performing poorly both exports and imports have been tending to contract in the last few years so all items of expenditure except consumption expenditure seem to have support a conclusion that the economy is not growing very well so only consumption expenditure that seems to be growing and exactly the same problem is being shown up even in this particular quarter that consumption expenditure is again showing high growth when you expect consumption expenditure to actually have been adversely affected and you see the same discrepancy between what the index of industrial production is showing happened in that quarter and what the GDP measure is showing. Despite governments claims that GDP has grown well anecdotal evidence evidence on the street suggests that Indian economy has in fact has not done so well so after four months of demonetization the cash that has been taken out of the economy not all of it has come back what do you think is its continued impact on the economy firstly the effect of the shortage of cash I do not think that that effect has fully disappeared by now because as of now the position is that is still on the availability of currency is to only or only about two-thirds of what it was before demonetization even assuming that there is some shift it is to non-cash transactions the scale of that shift would not be that high as I have said other figures indicate as to make up for the shortage of cash. So, one is that the effect of shortage of cash even if it is not as severe as it was earlier in this four month period that effect is still continuing it is not gone. The second is that when economic activity in a particular period is disrupted or affected adversely it is not that the recovery from that happens as soon as you restore the old in general condition. So, let us say if some economic activities were adversely affected during this particular period it is not that as soon as currency comes back they will bounce back immediately because the effects of that disruption can last into the future. Certain kinds of production activities like agriculture where the production itself comes later in the future the effects of demonetization may be seen only later when the next crop comes when the effects of demonetization on sowing in this period may be felt only in when the next agricultural output comes. So, there will be effects of demonetization that will last into the future and if I put this into a longer term context the future and the present are both part of a longer term story in which there have been very clear signs that the Indian economy significant parts of the Indian economy are not growing rapidly. So, the indicators of physical production industrial production or agricultural production they clearly indicate a stagnation in production in the Indian economy. Other indicators like investment also show that for five six years there have been virtual stagnation in investment in the economy. So, if in economies volume of industrial production is not increasing volume of agricultural production is not increasing investment is stagnating you would say that such an economy is certainly facing serious difficulties which in a sense this seven percent seven and a half percent growth figure is hiding that behind that this is actually what is happening. So, demonetization has had an effect in such a background and rather than correcting the problems which are responsible for this it has aggravated that and therefore the effects may be felt for a long time in the future. But of course if we don't have correct ways of measuring that effect we will never know precisely what is the degree of that adverse effect. Thank you professor Majumdar for coming and discussing this issue with us. Thank you so much.