India's Q3 GDP numbers may not have recorded true impact of demonetisation

India's GDP growth for the period between October to December 2016 outran market expectations and stood at 7%.  Although this was lower compared to 7.4% of the preceding quarter but was way above than what analysts expected.

Care Ratings expected GDP growth for Q3 period at 5.4%, while economists in a Reuters poll believed a 6.4% GDP growth citing PM Narendra Modi's demonetisation drive as a main reason for drop.

State Bank of India (SBI) in its report said, “The Q3FY17 estimates are crucial in the sense that it should have given the impact of what happened in the economy during those two months of demonetisation.”

Here are the GDP estimates provided by Central Statistics Offices for FY16 and FY17 which points out towards impact of demonetisation not being recorded in its truest sense.

During first two quarters of FY16, the GDP estimates were at 7.8% (Q1FY16), 8.4% (Q2FY16) compared to its provisional of 7.5% (Q1FY16) and 7.6% (Q2FY16).

Same scenario was expected in Q1 and Q2 of FY17 indicating significant improvement in economic activity in first half of current fiscal (1HFY17).

SBI said, “The steep downward revision of Q3 FY16 has in turn led to higher growth in Q3 FY17, thus masking the impact of demonetisation in the Q3 figures. “

The bank added, “Even then it seems implausible that the positive effect of downward revision in previous year is strong enough to overpower the negative effect of demonetisation in Q3 FY17. The numbers seems too good too be true.”

However there were some numbers beneath the surface which did signify the impact of demonetisation.

Growth in Construction and Finance sub-segments were at 7-quarter lows and at an all time low, respectively in the current base year. Construction and Finance Sub-segment in Q3 stood at 2.7% and 3.1% compared to 3.2% and 10.4% of Q3FY16.

Data suggests that growth rates of these two segments are going to recover in Q4FY17.

SBI said, “ With cement dispatches for January 2017 declining by a whopping 13%, it is not clear how construction activity is reviving in Q4FY17. Similarly bank credit growth is still at Dec 2016 levels.”

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SBI said, "Overall, the GDP numbers seems to suggest we may have just leap-frogged the impact of demonetisation."