HSBC projects GDP growth at 6.3 per cent amid note ban move

Foreign brokerage HSBC on Monday projected sharply lower growth numbers for the year at 6.3 per cent, way lower than the official CSO estimate of 7.1 per cent for 2016-17.

The Central Statistical Organisation (CSO) had over the weekend released GDP estimates wherein it had pegged growth at 7.1 per cent for 2016-17, lower than 7.6 per cent in the previous fiscal year. The CSO said it did not calculate the impact of the note ban on economic growth.

The HSBC report, penned by its chief India economist Pranjul Bhandari noted that the GDP projection “is not of much significance because the CSO has used inputs used for until September/October, which is well before the November 8 demonetisation”.

This is surprising, said the report, as “CSO had access to some post-demonetisation data for banking, it chose to stick to data till October. As such the CSO estimate does not carry the full extent of the drag to activity inflicted by demonetisation”.

As per the report, taking into account cash elasticity of GDP, economy is likely to grow at 6.3 per cent in 2016-17.

“It is not mandatory for the Ministry of Finance to use the CSO advance estimates. We expect it to use a lower real growth estimate that takes into account data released since demonetisation,” Bhandari said.

Further, she noted that the government data on inflation, industrial production, car sales and trade details, etc are expected to be released in the coming days, will give a clearer picture of the unfolding impact of demonetisation.

“We expect lower inflation (primarily led by food prices), weaker industrial growth and a narrower trade deficit,” Bhandari said.

According to her, the CPI inflation is likely to fall further to 3.3 per cent in December from 3.6 per cent in November, as falling food prices may offset increase in oil prices. Besides, WPI inflation may lower to 2.9 per cent in December from 3.2 per cent in the preceding month, in 2016.  The brokerage has estimated industrial production to grow at 0.5 per cent in November versus negative 1.9 per cent in October.

“Following demonetisation, we expect a significant 3 per cent month-on-month seasonally adjusted sequential decline in the industrial production index. Most high frequency indicators such as vehicle sales, PMI, and core industries have dipped lower following demonetisation.

“However, despite expected sequential decline, in annual terms IIP (Index of industrial production) may register a positive 0.5 per cent year-on-year growth due to favourable base effects,” Bhandari added.