The absence of the linkages with the developments in various sectors does bring in a bit of scepticism
The GDP growth numbers will always continue to puzzle the analyst because of the fundamental disconnect between the concept of physical activity in various sectors and its manifestation in the concept of value added in the new methodology which has come to stay. GDP is conventionally defined as value added in various sectors, and hence, the concept is not really different in the new methodology. However, the numbers presented for the year are at variance with what is happening at the sectoral level, which adds to the confusion. Several questions remain unanswered when we have to interpret the 7.3% growth in FY15.
Agricultural production, for instance, is lower in production terms for both the rabi and kharif crops in FY15 relative to FY14. Yet, we have witnessed an increase of 0.2%, which, though marginal, is still hard to reconcile. Does it mean that the lower production numbers which correspond with not-so-low numbers in value terms mean that our farming sector has become more productive? We have always been lamenting that productivity in this sector is low due to years of neglect. While this cannot be ruled out, at the same time, it is hard to believe that this could have happened across all crops. While higher production of forest and other products could account for the reversal of the sign, given its lower share and the fact that they are low value-added products, it looks unlikely that it could turn around the number.
Manufacturing is probably even a more glaring enigma here. The IIP data shows that this sector has grown by just 2.3% in FY15. Yet, the value added by this sector has witnessed growth of 7.1%, thrice the growth rate in the physical market. Could productivity have increased by this multiple in a sector that is still struggling with compressed growth, loss of competitive edge due to low pricing, low investment and pressure on debt-servicing?
The financial results for corporates in this sector show stagnant growth in sales and low profit margins, which makes it hard to believe that value addition has increased significantly. Value added is the sum of profits and wage bill in terms of the P&L account. If the former is low, then value added cannot increase by a large amount. This is the conundrum because the methodology uses results of a large sample of companies which could account for the higher value added to begin with in FY12 through FY14. But on this high base, getting 7.1% growth does look difficult considering that the main earners of profit are the large companies that have not been doing well in the last couple of years. Low inflation for manufactured goods has been a double-edged sword. While it is good for the economy, companies have been priced out of the market. This is because they have had to take a hit on their margins in a regime of declining prices.
The two double-digit growth sectors are trade, transport, etc, and finance, which have grown by 10.7% and 11.5%, respectively. Normally, growth in trade and transport are linked to the activity in the other sectors. If farm-output is virtually not growing (accepting the 0.2% number) and physical industrial output has grown by just 2.3% (accepting higher value addition), this segment could not possibly show an increase of 10.7%, which came on top of growth of 11.1% in FY14. These companies should have been earning supra-normal profits, which is not the case when one looks at the balance sheets.
The fuzziness is compounded by the performance of the financial sector which shows value addition of 11.5% at a time when banks are struggling with their profits in an environment where the growth in credit and deposits has been the lowest in years. Hence, with low growth in business levels and profitability—banks are working under stressful conditions of both NPAs and capital—generating a growth of 11.5% doesn’t reconcile with the facts. Stock market activity could account for a part of this growth given that the stock indices have been vibrant, but again their share in the sector is low.
Last, the public administration component has shown an increase of 13.7% in nominal terms and 7.2% in real terms.
This is broadly speaking the government’s contribution to the GDP growth. The curious observation here is that the total expenditure of the central government in FY15 was higher by 7.8% in nominal terms while value added has increased by 13.7%. Can this mean that the component of public expenditure has become more value-added-accretive? If this were so, then, as a corollary, can we say that the government should start spending more as the elasticity of value added to physical expenditure is actually more than unity?
While GDP growth numbers are certainly impressive as they indicate there has been a smart recovery this year, at 7.3% against 6.9% last year, the absence of the linkages with the developments in various sectors does bring in a bit of scepticism which, in turn, comes in the way of actually providing comfort on the turnaround. Even earlier, when the new methodology was introduced, the growth number of 6.9% in FY14 was at significant odds with the 4.7% number registered in the earlier methodology.
Based on pure statistics, one can extrapolate these numbers into FY16 and map the relatively better numbers in say manufacturing as per IIP, higher growth in credit, pick up in infra, etc, with a higher GDP number to justify a growth rate close to 8%. This would also mean that in case the physical production in manufacturing or agriculture scale heights of say 8% and 5%, respectively, the Indian economy should then be posed to record GDP growth numbers in double-digits. Would this kind of a scenario make us feel more confident?
The author is chief economist, CARE Ratings. Views are personal