Modi Flying Blind Into Budget as India’s GDP a Guessing Game

  • Statistics Office didn’t estimate impact of Modi’s cash ban
  • Government advanced budget presentation by a month to Feb. 1

Narendra Modi.

Photographer: Graham Crouch/Bloomberg

Prime Minister Narendra Modi’s administration will probably have to prepare India’s $300 billion budget in the dark.

With less than a month to go before the annual presentation, his Statistics Office has refused to estimate the impact of Modi’s unprecedented cash clampdown on gross domestic product. All it said on Friday was that growth will slow to a three-year-low before the effects of the ban start to show.

"If the budget has to be tabled by Feb. 1, the papers will have to go for printing by Jan. 20. This would indicate that they won’t get any more data," said Pronab Sen, who was India’s national statistician until 2010. The Statistics Office correctly used available data to offer an estimate of what the economy would look like without demonetization, and left the Finance Ministry to fill in the blanks, he said. "How much they will shave off, no one can guess."

Sen estimates GDP will expand about 6 percent in the year through March 2017, compared with a median 6.8 percent projection in a Bloomberg survey. There isn’t enough evidence "to say anything about demonetization, one way or the other," Chief Statistician TCA Anant told the Business Standard newspaper.

The government has sufficient data to prepare the budget, Finance Ministry spokesman D.S. Malik said by phone on Sunday, without elaborating. 

Yet there were only a handful of indicators available to the Statistics Office that capture the economy after Modi’s Nov. 8 decision to invalidate 86 percent of currency in circulation, such as farm output and sowing, government expenditure and sales tax. Corporate results won’t be filed before early February, said Dharmakirti Joshi, chief economist at Crisil Ltd., the local unit of S&P Global. The government will be handicapped in estimating recovery timelines for various sectors, he added, complicating an already fraught budget-making process.

A credible view on growth is essential for the government to project revenues and spending in a nation where a million people enter the workforce each month. The 2017 announcement is of special importance because it’ll be followed by a series of crucial state elections.

To further muddy the waters, Modi’s move will disproportionately be felt in India’s vast shadow economy, which relies on cash and employs more than 90 percent of India’s workers.

Read how the cash ban has impacted India’s $1 trillion hidden economy

‘Never Know How This Will Turn Out’

These effects won’t be directly captured in the GDP data, according to Gita Gopinath, economics professor at Harvard University. Human suffering in the form of job losses risks flying under the radar, or showing up indirectly as an antiseptic dip in consumption as daily wage earners defer non-essential spending.

Modi had touted the move as India’s biggest step against tax evasion and graft. While critics decry it as short-sighted, supporters praise Modi for his boldness.

"No economist worth his salt should comment on the long term impact demonetization is going to have on the Indian economy," said Abhay Aima, country head, private banking group, retail liabilities, digital banking and international consumer business at HDFC Bank Ltd. "There has been no precedence of something like this. You never know how this is going to turn out."

Higher Tax Revenues

Tax collections in the year through March will exceed the government’s estimates as demonetization forces members of the shadow economy to declare unaccounted incomes, Finance Minister Arun Jaitley told reporters in New Delhi on Thursday. Windfall gains from the exercise will be between zero to 1 percent of GDP, according to Standard Chartered Plc. It predicts the government will retain its target of narrowing Asia’s widest budget deficit to 3 percent of GDP in the year starting April 1 though a deviation to 3.3 percent can’t be ruled out.

Apart from "forecasting challenges," the government will also probably overhaul the format of its budget, removing a historical distinction between so-called plan and non-plan spending that was a relic of Soviet-style five-year plans, Standard Chartered analysts including Anubhuti Sahay wrote in a report on Friday.

"The finance minister will face new -- and probably more significant -- challenges than in recent years when he presents the budget," they said. "Don’t miss the forest for the trees."

— With assistance by Unni Krishnan, and Anto Antony

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