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Fresh wave of doubts arises over India's growth rate

Fresh wave of doubts arises over India's growth rate

Author | Collin Furtado | Monday, Jun 08,2015 8:56 AM

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Fresh wave of doubts arises over India's growth rate

The Indian economy has overtaken China’s economy to become the fastest growing economy in the world. During the last quarter (January – March) of FY2015 India’s GDP grew by 7.5% according to Central Statistical Organization (CSO) of India, while China grew by 7% in the same period. And according to estimates India’s economic growth is going to continue to be ahead of China’s in the next few years. During the full year 2014-15 however China was still ahead with a growth of 7.5% from India’s growth of 7.3% missing the CSO’s estimate of 7.4%.  

This is not the first quarter where India had celebrated the triumph over China’s economy. In the previous quarter (October – December) the CSO had earlier stated that the GDP growth in quarter was 7.5%, which was higher than China’s growth, only to revise it sharply to 6.6% on May 29. This was almost a 1% correction in the GDP growth figures. Apart from this the recalculated GDP for 2012-13 was revised from 4.7% in the old series to 5.1% in the new series, while 2013-14 was raised to 6.9% from 5% earlier.  This has further fuelled skepticism domestically and internationally about the new GDP series of the CSO under the Narendra Modi government.

In the new GDP series the CSO has revised the calculation of GVA (gross value added) and changed the base year on which comparisons are made from earlier 2004-05 to now 2011-12. The new method of measurement takes into account economic activity by market prices instead of factor costs taken earlier. It also takes into account gross value additions in goods and services as well as indirect taxes. This includes various income many of which is informal in India and was not taken into account earlier. For instance the new GDP figures take into account even the value of meat byproducts and even the droppings of animals which is used for the production of manure (termed as evacuation rate) from a research data collected in Makhdoom, Uttar Pradesh. Though the CSO says that the new GDP series follow international standards of the calculation of the GDP, there has been a lot of skepticism and doubt expressed by various economists in India and internationally.     

Of the latest people to voice their doubt over new GDP series was RBI Governor Raghuram Rajan, who during the recent bi-monthly monetary policy review left enough hints regarding the central bank having serious concerns on the latest GDP figures released. Rajan said in a media report, “In the eyes of the rest of the world, it is a discrepancy why we feel the need for rate cuts when the economy is growing at 7.5 per cent. Most economies growing at 7-7.5 per cent are just going gang busters and the issue there would be to restrain rather than accelerate growth”. Regarding the GDP numbers he said, “Even with the 7.5 per cent growth numbers there is some discussion of how much that includes special factors in the last quarter including excise taxes and subsidies. When you deduct that, the growth in the last quarter does not look as strong”. He further said that is an irony that the fastest growing economy in the globe had to resort to monetary easing to support growth. This was said in reference to the repo rate cut of 25 basis points that the RBI announced the same meeting. “We are under no illusion that the economy, especially investment, is up and running. It is not. It needs support. We are trying to use whatever room we have to undertake measures that revive the economy,” Rajan said. These words come from a man who predicted the worst economic crisis that hit the US in 2008 engulfing the economies of the world.

Apart from him many other economists have voiced their concern regarding the new GDP series. Arvind Subramanian, Chief Economic Advisor in a media report, when asked how did he assess the new GDP numbers said “I am puzzled by the new GDP growth numbers. This is mystifying because these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy”. He further added, “The year 2013-14 was a crisis year - capital flowed out, interest rates were tightened and there was consolidation - and it is difficult to understand how an economy's growth could be so high and accelerate so much under such circumstances. Also, look at the other data -in 2013-14, import of goods apparently declined 10 per cent; this, even after accounting for the squeeze on gold imports, is high. Typically, growth booms are accompanied by surges in import, not declines. Similarly, data show real gross capital formation declined in 2012-13 and grew at a modest three per cent in 2013-14. It is not usual for growth to accelerate so rapidly in this situation. Another puzzle is there was actually a downward revision in the GDP deflator when, in fact, there was high inflation.”

Similarly, many other economists had issues with the difference in the manufacturing data with the IIP (index of industrial production) which measures factory output, which in essence should be similar. State Bank of India economist Soumya Kanti Ghosh in a media report had said, “Nothing on the ground suggests the economy is growing at 7.4% rate. The number is fine if one goes by the internationally agreed standard, but one is unable to match especially the manufacturing data with the corporate sales numbers”. Similarly, Madan Sabnavis, Chief Economist at Care Ratings agency said, “There are still some anomalies in reconciliation of IIP data with GDP data as manufacturing shows growth of 6.8% for FY2015 which looks unlikely under the IIP which will probably be between 2-3%. The difference may be attributed to the GDP being based on value-added concept while IIP is on production—though the two should ideally converge”. Another economist Shilan Shah, India Economist at Capital Economics in an article said that the GDP data for January-March period in reality remain wildly inconsistent with numerous other indicators that point to continued slack in the economy.

They all throw across several important points as to the differences in the new GDP figures to the ground reality of the economy. One being the difference in IIP numbers that reflect manufacturing growth and demand (which was at a low point) and the new GDP figures that show high growth. Similarly, there has been disparity voiced out in the results of corporate earnings reports of key sectors such as automobile, banking, FMCG and retail which have been low and recovery of bank credit also being low to the new GDP numbers which shows high growth. The main point that these economists raise is the stark difference between the new GDP figures that paint a picture of high growth in the economy and the on-ground reality which is completely opposite to it.

Many economists even advise not go by the new GDP figures as it can affect policies and decision making of companies. For instance the RBI takes policy decisions bases on the GDP figures, similarly a lot of other institutions governmental and non-governmental take decisions based on this. The RBI’s figures of growth were 5.5% for the year and they have taken the decision to stick to it at the moment.

In fact due to these doubts expressed in the GDP data the government is now looking to review the numbers by setting up an expert group. A three-member committee headed by Pronab Sen, Chairman, National Statistical Commission was announced at the end of last week to investigate the discrepancies, if any, in the manufacturing data and the services sector data.  

Many of the future growth estimates by international organizations which are also based on the CSO figures. This brings up the question whether these growth expectations are actually achievable. It also brings us to bigger point that we will need more than a change in the numbers for the Indian economy to grow.    

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