India’s latest gross domestic product (GDP) numbers have perplexed observers of the country’s economy. There is certainly plenty of reason to be skeptic about these numbers as they seem completely in conflict with other economic indicators, such as growth in agriculture and allied sectors, poor corporate performance, rising non-performing assets (NPAs) and a shrinking index of industrial production (IIP).
A quick look at the numbers: the GDP for FY 2016-17 has been revised upwards from earlier estimates of 7-7.5% projected in the mid-year economic review, to 7.6%. Overall growth is expected to be driven largely by the growth in the manufacturing sector. But economists and analysts have publicly expressed doubts about the new numbers, which have been revised based on a new method of calculating GDP. The new method uses FY 2011-12 as the base year instead of FY 2004-05. The revised calculation also incorporates more comprehensive data on corporate activity, and newer surveys of spending by households and informal businesses. The new method is based on gross value added (GVA) at market price rather than factor costs. These changes in calculation methods has brought Indian GDP calculations more in line with global practice.
The popular and official view is that the Indian economy is growing, but high frequency data suggest otherwise. The GDP data for the current financial year had estimated manufacturing sector growth at an annual 12.6% during October-December, but the latest numbers for the IIP indicate a mere 0.9% rise during the same quarter. The gap is surprising. The government, however, maintains that the two sets of contradictory numbers are based on different methods of calculation.
The change in change
The change in measuring the GVA in the manufacturing sector needs to be understood properly. The performance of the sector was previously evaluated using data from the IIP and the Annual Survey of Industries (ASI), which comprises over two lakh factories. The new method uses more comprehensive data on corporate activity. Earlier, ASI data was also used to gauge activity in the manufacturing sector, but now firms’ annual accounts filed with the Ministry of Corporate Affairs are used, which includes around five lakh companies. All seems well here. But the problem is with methodology adopted.
According to R Nagraj, an independent member of the sub-committee that examined the new methodology to estimate output, the version adopted by the Central Stastical Organisation differs dramatically from the report finalised by the sub-committee in September 2014. The difference between the estimates of GVA in manufacturing (FY 2012-13) highlighted by the two versions of the sub-committee report is as high as 108%. This obviously raises doubt about the growth numbers unless a rational justification is put forward.
A look at other indicators
A huge pile of burgeoning NPAs is pushing many state-owned banks into losses. Nine PSU banks have suffered a combined loss of 11,251 crore rupees for the December quarter. The mayhem in the stock market led to the BSE Sensex losing 6.7% and touching a new low (22,951.83) during the week till Thursday (February 11), while the Nifty also fell below 7,000 and closed 3.32% lower at 6,976.35 points, its lowest close since May 9, 2014. An accelerated sell-off by foreign institutional investors on the weak global economic outlook and concerns over the health of some of the Indian banks triggered the market turbulence.
India’s merchandise exports shrank for the 13th month in a row in December. According to latest data, exports contracted 14.75% to $22.3 billion, while imports shrank 3.9% to $33.9 billion, amounting to a trade deficit of $11.7 billion. According to the Ministry of Commerce, exports are projected to decline by 13% from the previous year’s level to $270 billion in 2015-16, with a trade deficit of around $120-125 billion. The government’s previous target of exporting goods and services worth $900 billion by 2020, increasing India’s share in world exports to 3.5% from 2%, now looks abstract.
India’s farm sector imports are on a rise due to two consecutive droughts and untimely rainfall. For the first time in 16 years, corn was purchased last month. India exported 2.8 million tonnes of corn in 2014-15; the government is likely to import 2 million tonnes of corn in 2015-16 and again in 2016-17. Domestic corn prices have risen over the past six months. The domestic production of lentils is falling short of the demand. Imports of protein-rich lentils are expected at a record 5 million tonnes this fiscal year, with similar volumes expected next year. Wheat stocks in warehouses are depleting fast. Although the stocks are enough for now, expectations of lower output this year after a poor crop in 2015 may fast deplete the stocks and force the government to import wheat.
Back to growth numbers
If the revised methodology is to be applied to previous years, then the Congress-led UPA government was not doing as bad as thought. But the new methodology appears questionable given that GDP numbers and high frequency data like auto sales (mostly two wheelers), growth in bank credit etc. seem to be moving in opposite direction, defying conventional economic logic.
Amid the confusion over the reality of economic growth, alternative forecasts are emerging, with some economists devising new techniques to gauge economic growth. Ambit Capital estimates show that economy may have grown at an annualised 5-6% in the October-December quarter. Citigroup has developed a heat map of 18 economic activities, according to which growth would more closely correspond with trends under the old GDP calculation method under which India showed below 5% growth for a long spell. The Reserve Bank of India too is turning to hybrid models that mix elements of the old and new GDP methods to get a better picture of the economy.
Taufeeq Ajaz is a researcher at the School of Economics, University of Hyderabad.