The national accounts for Q3 of FY17 have been extensively trolled, some questioning them as “too good to be true”. This article attempts to open up the conversation, shows some of the underlying constructs of the GDP, GVA metrics and plays the devil’s advocate on some others.
The national accounts for Q3 of FY17 have been extensively trolled, some questioning them as “too good to be true”. This article attempts to open up the conversation, shows some of the underlying constructs of the GDP, GVA metrics and plays the devil’s advocate on some others. The debate is not new, and has come up intermittently after the initial outburst when the new methodology for computing GVA was first unveiled in early-2015.
First, the System of National Accounts are a set of rules which are standardised across countries. India now conforms to global standards. [Remember the years when India’s growth data in the IMF’s World Economic Outlook (WEO) growth tables used to be designated with a footnote stating India’s GDP was a different construct? We are now in line with other countries’ accounting]. These rules are applied to a set of pre-specified data which are proxies for estimating the GVA segments. The Central Statistical Organisation does not have the discretion to pick and choose “appropriate” indicators.
As for the segment-specific estimates themselves, the hit to the Q3 GVA has largely been on precisely those sectors which a priori anecdotal narratives had pointed at: construction (2.7%), financial services and real estate (3.1%). But there was a “surprise”, too: one would have thought that the largest impact of the note-ban would be felt by the ‘trade, hotels, transport & communication’ segment—but it actually printed higher than expected. In retrospect, this should have been partially foreseen. In communication, Q3 was the quarter when a particular telecom company started operations with a splash. Growth of the number of telecom subscribers (the main proxy for the segment), steady at an average of 6% since mid-FY15, shot up to 11% in Q3. Communication has a weight of 1.8% in GVA. This is likely to have more than offset the presumed slowdown in the other sub-segments.
The standout growth was in the manufacturing segment (8.3%) which—demonetisation or otherwise—is largely perceived to be faltering, seen through the lens of the Index of Industrial Production (IIP) and partially through the tepid corporate results. The accompanying chart explains some part of the underlying constructs. The CSO press release for Q2 FY17 (as also PRs for many previous quarters) states that for the manufacturing segment, “the private corporate sector growth (which has a share of over 70% in the manufacturing sector) as estimated from available data of listed companies … The growth in quasi-corporate and unorganized segment which … has a share of around 22 percent … has been estimated using IIP of manufacturing”. That’s a combined 92% of manufacturing GVA.
We have tracked these metrics in comparison with the reported GVA manufacturing. The corporate GVA (of a sample of 1,858 companies) comprises both operating profits and salaries and wages, to obtain a measure closest in intent to value added. Manufacturing corporate GVA grew at 21.5% in nominal terms in Q3 FY17, driven largely by metals (steel in particular) and capital goods companies. Obviously, the key driver have been rising metals prices. The other major contributor were the upstream oil and gas companies. The weighted average of corporate GVA and the IIP—with the above mentioned weights—is 15%, higher than the reported 11.8% nominal manufacturing sector growth.
It’s the same story with the mining segment, with a reported growth of 11.4% nominal growth, up sharply from an average 2% growth in H1 FY17. And yes, there will be a spillover of the slowdown in Q4, which is indicated by the high 18% growth in change in stocks (inventories), which will need to be drawn down before full production resumes. But this is likely to be limited, with leading indicators of manufacturing activity (including PMIs) indicating a return to normalcy. What is a bit puzzling is that the high inventories growth in Q3 is in line with high growth in H1 and what this tells us of the supply-chain management.
Without question, these estimate have not picked up large swathes of the informal segments of manufacturing and the services sectors, which will be progressively revised downward with each ongoing revision. But even here, the drops will not be significant. The only estimate of the smaller, quasi-corporate entities is a study released by RBI last year of about 237,000 private limited companies. Net sales of these companies was only 46% of a set of 2,900 listed companies in FY15 and operating profits just 31%.
Developing better surveys to track the informal sector remains a work in progress at CSO, and we wish this had been expedited. However, many improvements in data coverage are likely to come on line in the near future.
The author is senior vice-president and chief economist, Axis Bank. With contributions from Abhay More and Abhay Chavan. Views are personal