Two straight years of drought, news of a slowing startup market and reported layoffs, increasing taxes, a relatively poor urban consumer class and a housing market slowdown aren’t exactly the tell-tale signs of a stellar economy--especially one that’s ostensibly growing at 7.6 per cent annually, the fastest growth rate in the world.
Last week, India announced that its March quarter GDP numbers grew at a staggering 7.9 per cent over last year, beating most economist forecasts who had predicted a more humble growth rate of 7.5 per cent. Euphoria has, naturally, ensued, and shows no signs of dying down.
But once you run a lens on the nuts and bolts of how the country’s GDP numbers are computed, what’s reported, what’s amiss or vague--Rs 1.43 trillion in "discrepancies” were reported in the most recent numbers--and the somewhat less flattering indicators of slowing industry and services sector growth, a slightly different, modest picture emerges, a picture that looks more like a puzzle than a runaway success story. In the most recent quarterly GDP data, India’s industry growth was 7.9 per cent in Q4, down from 8.6 per cent in the previous quarter, and services sector’s growth fell from 9.1% in Q3 to 8.7% in the latest quarter. Agriculture, industry and services comprise most of our economy.
One such missing piece in the GDP numbers has been these “discrepancies’, which are unusually large at Rs140,000 crores, and make up about 51% of the March GDP growth rate, meaning without this item the growth rate would have been a mere 3.9%. While discrepancies, in and of themselves, aren’t new, they stand out starkly against the last fiscal when it was less than Rs30,000 crore.
Economists note that these discrepancies occur when the production and output data reported by industry doesn’t immediately tally with the expenditure data including private consumption, net exports, and government spending among others--which forms another indicator of growth. In theory, these two figures should align but that often proves difficult in a vast country like India where data collection is spotty. With large unregulated industries, data reporting is also not timely, say economists.
“The production approach and consumption approach give you different estimates,” said Marie Diron, an analyst with Moody’s Investors Service.
Another factor is the use of “deflator” in calculating the final consumption and production figures to account for the price changes in the economy. In the most recent fiscal, the deflator was unusually low because of the historically low inflation and the favourable global macro environment of low commodity prices, noted Bidisha Ganguly, chief economist with Confederation of Indian Industry (CII).
India’s Central Statistics Office (CSO), has subsequently said it will soon release supply and use tables which will try to map the sources of production of items and their end use, a move that will aim to explain away these discrepancies. Chief statistician T.C.A. Anant told Mint that these discrepancies had happened in the old series too, of a higher magnitude.
“Expenditure-side figures for the most part are estimated indirectly than the production side figures, except for exports and imports where direct data is available from the Reserve Bank of India (RBI). In all other categories, both consumption and investment, we have very little direct data available and certainly (this is so) at the time of compiling the provisional estimates,” Anant said, adding that at the provisional estimates level, capital formation is computed using estimates from the previous year and growing them with certain indicators which are available on capital goods from index of industrial production (IIP) and some other sources.
While analysts and economists HuffPost India interviewed did not suspect the credibility of the reported data, citing overall superior reporting standards compliant with the global standards, one thing they all seem to agree on is that overall India has been a beneficiary of the windfall from the external macro factors of last year. In that context, it would be premature to credit all the reported growth uptick to the policies of the current government as the impact of reforms is typically gradual and is unlikely to show in a couple of years.
Last year, India also moved to a different methodology of reporting its GDP numbers--one that’s aligned with the international standards that most advanced economies like the US use. Had this reporting standard been used by the previous UPA government, the last reported GDP growth rate of 4.7% under UPA government may have been at least two percentage points higher. That means the current growth jump wouldn’t have been as dramatic as it looks now.
To be sure, India’s corporate earnings are on the upswing, at least in the most recent quarter. According to the Financial Express, which studied the earnings of 1,200 companies, the Q4 profits have increased by about 42%.
Moody’s expects India’s growth rate to be 7.5% in 2016 and 2017, an outlook that is supported by more favourable inflation, fiscal consolidation, and a series of measured policies aimed at reviving private consumption and incomes, noted Diron. She added there remains pockets of weakness such as slower wage growth and high leverage, especially in the banking sector.
In the meantime, it’s imperative for the government to explain or improve its data collection methods that will help build credible growth estimates that can then dictate better policy decisions, and inspire confidence.
“If the discrepancy continues to be this huge for the next two quarters, that would be a cause for concern,” said Laveesh Bhandari, founder and managing director at economics research firm Indicus Analytics.
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