Pessimists on Indian growth will have to look for pastures other than the new GDP data
Everybody is talking
about the new GDP
But no one is hearing
what the CSO is saying
I’m going where the data are clear
Through the clouds of ambiguity
Going where there is no discrepancy
Between estimate and reality.
(With due apologies to Harry Nilsson’s “Everybody’s Talkin’”)
Everybody’s talking about India’s GDP growth prospects and the “fact” that Indian GDP growth might exceed that of China for a second successive year, FY16. How did this “miracle” come about? Many people, and economists, and commentators, feel that the miracle is a bit of a fudge. In addition to the hoi polloi, major institutions have also questioned the new GDP data, and expressed puzzlement, if not bewilderment.
The list of the puzzled is long—the ministry of finance (MoF), RBI, IMF, Moody’s, etc.
What is all the commotion about? In the beginning of the year (January 30, to be exact) the Central Statistical Organization (CSO), the arbiters and owners of GDP data, shocked all of us by stating that according to revised estimates, GDP growth in India, in FY14 (FY 14), was a hot 6.7%, in comparison to the cold 5% we had all believed. The new data also suggested that Indian growth rate was at least equal to that of China, if not higher, for two consecutive years, FY15 and (forecast) FY16. With the old GDP data, there was no chance of this “excess” for the next few years, let alone today. So, a pyrrhic victory for India in the growth sweepstakes?
An emphatic “no”. There are consistent explanations to this “GDP puzzle”—explanations that suggest that the CSO has got it right. There is no explanation, however, for CSO’s miscommunication. If only they had explained their workings, and provided a back-series, many fewer trees would have been felled, and very likely this article would not have been written!
Broadly speaking, the puzzle solving is as follows, and not independent of politics. First, Lok Sabha elections were held in May 2014, just after the second successive bad GDP growth year of FY14—only 5% growth compared to 4.7% the year before. The BJP, and Narendra Modi, won largely because the economy was in shambles, and now we are expected to believe that growth was touching 7%? It is fair to state that if the year of the big growth upgrade was not an election year, there would have been considerably less controversy. Second, the fair argument is made that for the last two years (FY14 and FY15), growth does not “feel” at 7% plus.
While the CSO is to be faulted for miscommunication, the analysts double-faulted by only concentrating on growth rates, and not enough on the levels of GDP. If they had done so, they would have noted that the level of nominal and real GDP, factor cost and market prices, are equal to each other, old and new series, for FY14. Second, that for FY12, the base year of the new series, real GDP is 2% lower (all comparisons with the old series, FY05 base); and in FY13, real GDP is 1% lower. So, this “fact” answers the query about why growth in FY14 has to have been at least 1% higher than earlier believed—mathematically, it had to be because the levels of real GDPs are equal in FY14.
But the puzzle remains unsolved—how come after all the revisions, etc, real GDP was 2% lower in the base year of revision, FY12? This goes to the heart of the differences between the old and new. Two sectors of the economy undergo fundamental changes in the revision—wholesale and retail trade (WRT) and manufacturing. The former sees a decline in its share of GDP by approximately 5.5 percentage points, and manufacturing witnesses a 4.5 percentage point increase. The new shares are about equal for both (18% of GDP). Which means that two-thirds of the old and new GDP is not witness to much change.
But this raises an additional question: Why do WRT and manufacturing see such large and unprecedented changes? Because of a change in methodology. Let us take WRT first. In the old method, value added in WRT between FY00 and FY12 was obtained primarily from wage and employment growth from the NSS Employment and Unemployment Survey of FY00 and FY05. More concretely, according to NSSO, WRT employment grew at an average rate of 2.8% between FY00 and FY05. This growth was then imputed (forecast) for the years between FY05 and FY12. But this forecast went horribly wrong—actual trade employment growth during this period was only 0.8 % per annum.
Hence, the fact that Humpty Dumpty could not be put together again, the search for a new method of computing GDP for WRT, and the arrival of the new “order”—henceforth, GDP in WRT would be computed on the basis of growth in sales taxes. What was nominal sales tax growth in the doubtful high growth year of FY14? A healthy 17.2%; with GDP deflator inflation of 6.3%, this is a high 10% real growth for 20% of the economy which is not on the radar screen of most analysts and market players. While analysts were looking at corporate balance sheets to get a sense of how India was growing, the real story was under their feet in unorganised Bharat.
This sector in the new data was growing at almost double the rate of the rest of the economy. This near 5% higher than average growth for WRT—20% of the economy—means an additional 1% growth for overall GDP growth. Add to this the fact that the GDP deflator inflation in the new series was 0.6% lower, and voila, most of the difference between 5% and 6.7% growth is explained.
The other big change is for manufacturing. Here, the explanation is simply usage of much better balance sheet data, available for more than 500,000 companies (the MCA-21 data base). Previously, the CSO relied on an old and aged warhorse to deliver information on industrial production, IIP data; now, the government harnesses the modern IT sector by processing balance sheet information on heretofore unimaginable large number of companies. The “feel” conclusion of a slow economy was derived from insipid IIP growth for FY14—a -0.1%—hence, the angst in the pink pages and among TV anchors. Manufacturing growth on the basis of MCA-21 balance sheet data reveals a recovering economy—growth of 5.3%. In FY15, the same data source reveals manufacturing growth at 6.8%.
One puzzle still remains. GDP growth for the year just ended (FY15) is forecast to be close to 7.5%. But for this very same year, nominal non-food credit growth of 11% is at a 30-year low. How can 7.5% real growth be plausible with such low non-food credit growth? Because of very low inflation, my dear. Deflator inflation, at 3.9% , was also close to 30-year lows, a fact that will be confirmed when very, very low deflator data for January-March 2015 become available. FY15 deflator inflation is likely to be less than the 3%-level recorded in 2001, i.e., real non-food inflation was not as low as believed because of “money illusion”.
Forecasts of India growing at 7.5%-plus, possibly 8.5%, for the next several years are likely to be correct. Pessimists on Indian growth will have to look for pastures other than the new GDP data.
The author is chairman, Oxus Investments, and Senior India Analyst for the Observatory Group, a New York-based macroeconomic policy advisory firm