The Central Statistical Organization (CSO) has just released its new series of national accounts data, rebased to FY12 from FY05 earlier. Going by past experience, it was largely anticipated that the revision could result in a significant increase in the size of the GDP without much change to annual growth rates. Instead, the statistical agency managed to deliver a googly: While the size of GDP was retained at almost the same level, it is the annual growth number that sprang a surprise. The sharp upward revision of FY14 GDP growth, to nearly 7% (at market prices) from an estimated 5% earlier, has projected a picture of economic revival that has few takers.
The surprise doesn’t quite stop at that. The new estimates for last three years also reveal a change in the composition of GDP—towards industry and agriculture, and away from services—that dramatically alters the growth narratives that had seized the mindspace of observers. Little wonder therefore that top policy-makers, economists and analysts are perplexed and have advised caution; in defence, most have flagged the numerous lead indicators that in FY14, had pointed in quite the opposite direction. On its part, the CSO has assured to release a detailed account of the new revisions by the end of this month; this information will provide an opportunity for further examination. Pending that though, it is worth probing if there is a rationale to these numbers from the data currently available.
To start with the issues related to growth recovery, the accompanying table presents just GDP at factor cost, old and new series, for an apple-to-apple comparison. The focus is to find an answer to what explains the growth acceleration of 170 bps, from 4.9% (old series) to 6.6% (new series) in FY14. A preview of the sectoral composition and growth rates clearly indicates that the contribution of industry was almost nil in FY14, given the sector grew by 5.1% over its 5% growth in FY13. Much of the acceleration in growth came from the services and agriculture sectors.
Therefore, the legitimate question to ask is why did industry not decelerate if most lead indicators such as the IIP, core infrastructure industries, capital goods imports, motor vehicle sales, etc, were flashing red? In fact, observing the old GDP series, this question is equally relevant for the previous year too, i.e., FY13.
Well, the answer to this question probably lies in how good or accurate an indicator the IIP has been! In recent years, the industrial sector data has been regularly revised upwards substantially with a two-year lag once the comprehensive Annual Survey of Industries (ASI) data comes in. Illustratively, the divergence between the IIP- and ASI-based data was 490 bps and 380 bps for FY10 and FY12 respectively. So when the fresh ASI data for FY13 arrives, a 390 bps divergence from the IIP-reflected industrial growth would not be out of line. But most likely, the improved coverage of industry activity—for firms governed by the Companies Act—from the ministry of corporate affairs database, and some reclassification has contributed to the change. Though indicators like sales, imports, etc, did not reflect a pick-up in economic activity in FY14, at least the financial side of the economy shows that outstanding bank credit to the micro and small industries segment accelerated significantly to 23.7% in FY14 over a robust 20.2% growth in FY13.
Moving on to other economic segments, the new series shows agriculture growth nearly one point lower at 3.8% (4.7% in old series) but with a larger share in aggregate output—an average 4.3 percentage points in last 3 years. That FY14 was exceptionally endowed by good rainfall is already known; this is equally reflected in strong growth of bank credit, 13.5%, to ‘agriculture and allied activities’ (7.9% the previous year) and pick-up in private consumption on non-durables in FY14 vis-à-vis year before.
Next, services’ growth jumped to 8.1% in FY14 from 5.9% in FY13. This is consistent with several indicators: One, service tax collections, which the CSO has used in the new revised series as an indicator for growth in respective services, grew robustly at 24.4% in FY14 over a 36% growth in FY13 (this was exceptional because of tax-base expansion as all but a negative list of services were included in the tax net). Two, construction rebounded in FY14 at 2.5% over a minus 4.4% contraction in FY13; this is again buttressed by RBI’s industry-wise deployment of bank credit data that shows outstanding credit to construction rose 17.7% against 7.3% in FY13.
How does one square up with the industry slack as steadily reflected in RBI’s capacity utilisation surveys? To understand this fully, one has to await the back-cast series from the CSO. Meanwhile, some back-cast estimates from other sources suggest a dramatically different growth picture that could not only overturn India’s growth story as understood so far, but also prompt fresh enquiry about the economy’s potential output growth. The FY12 base GDP back-casts show that growth never really slowed except in the crisis year of FY09 (GDP probably grew 3.7% against 6.7% measured by old series) and remained above 6.5% in all but one year subsequently. Not only does this alternate growth trajectory point to India’s close external interconnectedness but also suggests that potential output of the economy might be higher than previously believed—perhaps around 6.5%—and that the potential capacity never lowered in these years. For all we understand so far, this would make the slowing economy a cyclical rather than a structural phenomenon, with the slow-growth, uncertain external environment after 2010 accounting for much of it.
Looking ahead for FY15, most expect GDP growth to strengthen further to exceed the 6.6% growth in FY14 with estimates bunching around 7% or so. However, all lead indicators point to a slow down this year:
- Critically, gross service tax revenues—the CSO has incorporated service tax collections for information on growth rates apart from the NSS data sources on services’ sector—have grown just 8.7% in April-December this year, which is less than half the robust 19.8% growth observed in the matching period in FY14 and suggestive of a slowing services segment this year. Total indirect tax collections grew 6.7% in April-December, 2014, not so different from corresponding 6.2% last year, suggesting not too strong an uptick;
- Export growth is lower in FY15—an average 4.3% monthly in April-December compared to a corresponding 6.7% in FY14;
- Bank credit growth has shrunk to an average 12% monthly in the same period (April-December) this year relative to a 14.7% monthly average in FY14;
- Capacity utilisation rates in manufacturing segment were at least 2-3 points lower in first half of the current year, indicating relatively higher slack in the economy;
- Growth in corporate earnings has further decelerated as per latest quarterly results, with sales little higher year-on-year and down over the preceding quarter;
- And bad loans are mounting at the banks as restructured assets slip into NPAs.
Looking at these indicators, one should expect the advance GDP estimates to show a slowing economy from last year’s 6.7%, or 6.9% at market prices, which is what would be published henceforth. This will not only be contrary to common expectations but will also be a jolt to a growth revival last year and will necessarily prompt examination of factors underlying the slowdown in FY15. If the revisions in the national accounts have made the past more uncertain, they have made the future even tenser. If a slowdown has really begun this year, policymakers, may have to reappraise monetary and fiscal policies.
The author is a New Delhi-based macroeconomist