Economists flummoxed on rise despite other data falling
Necessitating a big change in how the state of the Indian economy is perceived, the Central Statistics Office (CSO) on Monday said it expected real GDP expansion in 2014-15 to be an impressive 7.4%. That is on the back of the recently scaled-up growth level of 6.9% for the previous year that suddenly seemed to indicate a revival as the CSO effected changes in ways of computing national income a few days ago — it adopted 2011-12 as the base year (previously, 2004-05) and started including chunks of new information.
The GDP growth figures have now been revised sharply upwards for all quarters since the first quarter of 2012-13 to the second quarter of the current fiscal (see table). The growth rate for the third quarter has been estimated at 7.5%, even higher than China’s growth of 7.3% for the latest quarter.
While government statisticians explained how they now captured (increased) value added per unit of output better, many economists found it hard to take the new numbers for granted, especially since the revival reported of 2013-14 was inconsistent with the various high-frequency indicators concerning the year, like the dip in non-oil/non-bullion imports and slump in auto sales.
However, the sheen of the new healthy growth numbers would diminish when the GDP is expressed in current prices. The nominal GDP growth in 2014-15 is seen at 11.5% (advance estimate) against 13.6% in 2013-14, as the CSO, due to the fall in inflation rate, used a lower GDP deflator of 3.8% for the current year compared with 6.2% for 2013-14.
The absolute nominal GDP of R126.5 lakh crore for 2014-15 would be lower than even the budgeted growth estimate of R128.76 lakh crore, which was calculated using the 2004-05 series and assuming a growth rate of 13.4% growth over the advance estimates of 2013-14. This is mainly because the absolute nominal GDP in 2011-12, using the new series, was revised downward by over 2 percentage points to R81.95 lakh crore.
This means all indicators expressed as a ratio of the nominal GDP, including fiscal and current account deficits, would undergo changes, and the fiscal deficit target of 4.1% of GDP would be a bit harder to meet. Finance minister Arun Jaitley said on Monday the government would would “try to keep fiscal deficit within the prescribed limit in the current fiscal”. He pins hopes on better tax revenue receipts in the final three months of the fiscal along with funds from disinvestment and spectrum sales to achieve that challenging goal.
The third quarter witnessed a big jump in government spending as is reflected in the whopping 20% growth in “Public administration, defence and other services” although on a low base (the corresponding growth in Q3 last year was 9.1% when UPA squeezed spending).
Justifying the latest estimates, Pronab Sen, chairman of the National Statistical Commission, said the high growth trajectory, especially since 2013-14, reflects higher levels of value addition. Only 40% of the GDP growth is on account of volume growth and the rest due to higher value addition per unit of output, he added.
Addressing the issue of not-so-robust tax mop-up despite the reported high economic growth rates, Sen said the stagnation in excise duty collection is consistent with the dismal Index of Industrial Production data, but some components of indirect taxes, especially on sales tax and services tax, showed buoyancy.
He added that companies may be underpaying advance tax. Meanwhile, in a reflection of improving growth prospects, the the Organisation for Economic Cooperation and Development has said its composite leading indicators — designed to anticipate turning points in economic activity relative to trend — for India inched up to 99.4 in December last versus November 2014.
Saugata Bhattarcharya, chief economist at Axis Bank, said: “After this number, the RBI will need to understand the dynamics of the high GDP numbers. This pushes back the time-line for rate cuts. Any hope of an off-cycle rate cut in March, even if the Budget is consistent with low inflation-driven fiscal policy, does not exist now. Now with such high GDP number, the CPI inflation is expected to also go up.”
The new series has seen the composition of certain sectors changing — the share of the services sector has been reduced to roughly 52% from 57%, while that of manufacturing has gone up to over 18% from 15%.
On the expenditure side, the growth in private consumption, according to the new series, has been forecast at 7.1% for FY15, compared with 6.2% in the last fiscal, and 5.5% in 2012-13. Similarly, government consumption has been projected to witness a third straight year of expansion — 10% for FY15 against 8.2% in FY14 and 1.7% in the previous fiscal. Gross fixed capital formation, too, is forecast to see an uptick in growth — 4.1% for 2014-15 against 3% in the last fiscal and -0.3% in the previous year.
With the change in the way the GDP is measured, which is more compatible with global practice,the headline numbers are now those expressed in market prices, as against the GDP at factor cost earlier. The government is also capturing a clearer picture of the corporate sector than earlier, thanks to the use of the MCA data base that offers information for 5,00,000 companies, instead of earlier practice of calculating on the basis of the balance-sheet of 2,500 companies. The real GDP in 2014-15 is now projected at Rs 106.57 lakh crore as against Rs 99.21 lakh crore in the last fiscal.