Exactly a year ago, when the Central Statistical Organization (CSO) released its new series of national accounts with base year 2011-12, it had created a flutter among analysts and policy makers. The estimates, based upon a new methodology and access to a new pool of data, had two surprise elements: one, the base year GDP size was measured much lower than the previous estimate, contrary to general belief; and two, a sharp growth recovery of nearly 200 basis points in FY14, which confounded everyone—it was the year of the ‘taper-shock’, marked by financial and exchange rate turbulence that severely dented many corporate balance-sheets who suffered from both interest rate and exchange rate shocks. It was difficult to reconcile to the fact that amidst this intense macroeconomic turmoil, recovery had firmed up, and that too, quite sharply!
Well, the first revised national income estimates that were released on January 29, 2016, seem to have added a slight twist to that tale. It now appears that a cyclical recovery had taken root a year earlier, i.e., in 2012-13. Or so it seems when studying the figures closely.
First, consider the revisions to the aggregates in the accompanying table. Panel A presents the initial and revised estimates of gross valued added (GVA) at basic prices in constant (FY12) terms. GVA levels have been marked down by R889 billion (FY12), R527 billion (FY13), R854 billion (FY14) and R996 billion (FY15) over the initial estimates published in January 30, 2015.
While it was but natural to expect some revisions to FY14 and FY15 estimates as more company filings from the MCA 21 data base became, it is a bit surprising to see such sharp revisions for the years FY12 and FY13. It is reasonable to expect that at least the base year estimates had been firmed up, and that revisions, if any, were to be only marginal. With the size of the base year shrinking further, GVA growth in FY13 was marked up by 50 bps to 5.4% from a previously estimated 4.9%; simultaneously, GVA growth in FY14 is revised down 30 bps to 6.3% from 6.6% before. So, the growth spike attributed to the FY14 in the initial estimates seems to have fizzled out; the revised data now indicate a gradual acceleration—cyclical recovery—starting a year earlier, in FY13.
How can we be sure that FY13 could be the year of economic revival, when the base year (2011-12) growth is still unknown? We presume that the CSO’s backcast series, when computed, would stick to the economic cycle narrative of the past; and if it does, with the size of the base year shrinking further, growth in FY12 would be much weaker than initially thought—even lower than 4.5%. This, in turn, will surely constitute a case for a full 100 bps cyclical recovery in FY13, with growth primarily driven by the non-agriculture (industry and services) sector, as the year was marked by a drought.
So, with the first revised round of the new national income series, FY14 is no more a dramatic year of growth recovery, but only of tepid acceleration. Although the headline GVA growth of 6.3% in the year might create a perception of trend acceleration, a large chunk of it was driven by a good monsoon; non-agriculture GVA grew just marginally more at 6.7% over the previous year’s 6.3%.
The tempting question then to ask is what could explain a cyclical revival in FY13, amidst stalled projects and policy paralysis? And why the recovery failed to hold on to the trend in FY14? One possible answer could be that an easier monetary policy from April 2012 supported growth, but the momentum failed to sustain with the uncertainties generated by the “taper shock” and subsequent, sudden reversal of monetary policy in the latter half of FY14. As the CSO’s press release did not include the quarterly disaggregates of the revised growth numbers (February 8 release does so for FY15 and FY16 only), it cannot be observed if growth decelerated in the second half of that year.
Then, how do we explain the sharp acceleration in non-agriculture GVA growth to 8.6% in FY15? Like many others, we do not have any convincing answer besides that of potential overestimation from an underestimated GDP deflator. But in the current context of sharp revisions in absolute magnitudes and growth rates, prudence demands a wait-and-see approach, i.e, if the CSO revises down the FY15 GVA estimates in January 2017.
Some of the revisions to a few sub sectors in FY14 are particularly noteworthy: the previously muscular trade and hotel sub-category seems now quite subdued, growing 7.2% rather than 13.1% as per earlier estimates; likewise, growth in the other services’ sub-category is now estimated at 5.6% rather 10.7%. Any revisions on a similar scale could possibly make the series more consistent, but would then raise a more pertinent question: What purpose does it serve for policy making if estimates undergo such significant revisions four years down the line, however, robust the methodology might be!
The author is a New Delhi-based economist