Ambit Says India’s Third Quarter GDP Data A ‘Flight Of Fantasy’
.jpg?downsize=1010:568 "Ambit Says India’s Third Quarter GDP Data A ‘Flight Of Fantasy’")
Ambit Capital, which had predicted a precipitous drop in India's GDP growth due to demonetisation, has said that data released by the central statistical office (CSO) earlier this week makes “little sense.”
In a March 1 report titled ‘CSO's Flight Of Fantasy Continues', Ambit argues that the 7 percent GDP growth reported by the government's statistical office for the third quarter is in contrast to indications coming through from the SME (small and medium enterprises) sector and bank credit.
Ambit Capital had predicted that GDP growth in FY17 would fall to 3.5 percent from the pre-demonetisation forecast of 6.8 percent. While Ambit was the most pessimistic, other economists had also forecast atleast a one percentage point drop in growth. The Bloomberg consensus estimate had pegged third quarter growth at 6.1 percent.
Government data, however, suggests that the economy was largely unaffected by demonetisation. Macroeconomic indicators and Ambit's interactions with businesses – especially small and medium scale enterprises – indicate that economic momentum “markedly decelerated” in the third quarter, the brokerage said.
Out of 17 high frequency indicators that Ambit uses to track the health of the economy, 10 lost steam in the third quarter, it added.
In particular, as per data provided by the RBI (Reserve Bank of India), non-oil bank credit growth in Q3FY17 was recorded at a multi-year low of 5 percent in nominal terms thereby pointing to the true extent of the economic slowdown.Ambit Capital
The October-December quarter GDP growth hasn't been backed by growth in bank credit either, Ambit said. While banks' cash deposits surged after the cash ban, the same is not being lent out by banks. Moreover, the pace of growth of digital payments slowed in December contrary to expectations.
This, the brokerage said, suggests that low levels of business activity translated into lower velocity of money. That is, each currency note in circulation is being used less intensively than was the case before November 8.
By definition, GDP is the product of the ‘amount of currency in circulation' and ‘velocity of currency'. Hence, the RBI (Reserve Bank of India) can control the amount of currency in circulation but cannot control GDP growth if the velocity is collapsing.Ambit Capital
Ambit reiterated its view that GDP growth will pick up in the fourth quarter compared to the third quarter and will accelerate further in financial year 2017-18. But in both cases growth will be lower than what it would have been if the government had not enforced the cash ban.
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