Lower-than-expected inflation is estimated to pull down nominal GDP growth to 9.5% in FY18, against the budgeted 11-11.5%, according to chief statistician TCA Anant.
Lower-than-expected inflation is estimated to pull down nominal GDP growth to 9.5% in FY18, against the budgeted 11-11.5%, according to chief statistician TCA Anant. This will impact the final projection of the FY18 fiscal deficit (expressed as a percentage of nominal GDP). In an interview to FE’s Banikinkar Pattanayak, he also explains why faltering GST collection in recent months is unlikely to dampen the real GDP growth trajectory much vis-a-vis the expansion in gross value added (GVA). Edited excerpts:
Does the advance estimate point at a substantial recovery in H2 of FY18, given the relatively favourable base?
The GDP grew 5.7% in Q1 and 6.3% in Q2. From that point, I think we see a substantial recovery in the second half of FY18. In fact, the data suggest H2 will be a major improvement on H1.
Why is nominal GDP growth seen at just 9.5%, much lower than the 11-11.5% estimated in the Budget for 2017-18?
There are two reasons. First, of course, is the impact of a slowdown. Second, inflation came in much lower than expected in the first quarter and chances are that at the end of the year, it will be much lower than what was anticipated at the time of the Budget (2017-18). Inflation will probably be less than what the RBI has been projecting so far.
Will lower nominal GDP not add to fears of a fiscal deficit slippage?
That issue will always come up. I can only tell you the reasons for it. Inflation actually turned out to be lower than what was expected in February or March last year.
Despite faltering GST mop-up in recent months, why is the real GDP rate higher by as much as 40 basis points than the real GVA?
On constant prices, the method of estimating the tax collection in real term is a complex exercise and is laid out in the SNA (the System of National Accounts, 2008, a statistical framework developed by IMF which was adopted by the CSO in February 2015). It’s linked to the growth in the taxable sectors. Increase or decrease in tax rates doesn’t lead to a substantial change in the estimates of indirect taxes in constant process. Even earlier, when the government had increased the indirect tax rates, it didn’t reflect correspondingly in real GDP growth.
The advance estimate doesn’t quite suggest a rebound in manufacturing (expected growth at 4.6% for FY18 vs 7.9% in FY17), that many were expecting after the manufacturing PMI touched a 5-year high in December. Why?
There is some implicit turnaround in manufacturing that is being shown in the H2 data. But ultimately, our projection is based on two data points: the index of industrial production and advance filing of manufacturing companies. So we are relying on actual data available so far and projecting a full-year growth rate, based on a laid-out methodology. We are not taking into account any non-linearity in projection or sentiments or expectations. PMI basically indicates sentiments and is not based on hard output data.
You said the GDP forecast was based on assumption the tax collections estimates will be met. Why is it so?
We work with budgetary estimates, actual data and revised estimate data, depending on their availability. We look at the figures available this year and we see the past trends for the months for which the data are not yet available. We use all of these for the advance estimate.
So the drop in GST collection in recent months wasn’t factored in?
Ultimately, you have to go by what the government reports. More importantly, taxes will have to be paid. Sometimes there is a delay in tax payment due to the fact that implementation system is being strengthened. For us, this taxable amount will come to the government coffer, if not in December, maybe later in this fiscal. For the likely tax collection data, we will have to go by the projection of the tax authorities who know how much the likely demand is going to be.
Private final consumption expenditure, a major driver of the economy in recent years, is seen as slowing down in FY18 to 6.3% from 8.7% in the previous year…
The growth is first measured on the production side. Then its allocation takes place in the demand side. Remember that the demand side data have to match the production side figures. So if the investment growth picks up, private consumption growth has to slow down in accordance with the overall growth projection for FY18.
Given that some latest high-frequency data points haven’t been considered in the advance estimate, is there a chance of an upward revision later?
Of course, that possibility is there. We have captured what is available to us through observable indicators in terms of actual output. But there are still three months of activities left in this fiscal. We haven’t got actual data in many cases even up to December.