With RBI seal of approval for new GDP data, we can move on to more challenging appraisals of the Indian economy
One does not often get a chance for saying “I told you so”. As readers of this column know, I have constantly reiterated that the new GDP data are authentic and correct (with the most recent one—Believe it, GDP data is right, February 22), and there finally appears to be new data, which can put this debate to rest. The controversy over the new GDP data has raged for over a year now, and each month brings in a new member of the Doubting Thomas tribe. Briefly, for those lying under a rock, the Central Statistical Organization (CSO) brought out , in January 2015, estimates for the new method of estimating GDP and published estimates of the new GDP from FY12 onwards. Revision of GDP data is a routine exercise, and has been conducted at least four times in the last 50 years. I am sure you never heard of the previous revisions and there is a political economy reason why you did not (more on that below).
The fact remains that this new GDP data has been questioned by all and sundry. And the doubters are a list of Who’s Who—RBI (including Governor Rajan), chief economic advisor at the ministry of finance, Arvind Subramaniam, and many foreign investors and prestigious publications (including The Economist, Wall Street Journal, and the Financial Times). And the questioning has varied from polite to downright defamatory. The polite version states that the new GDP data, showing a one to two percentage point increase in the growth rate than previously estimated, is incorrect because it does not feel right.
The major difference between the old and new was that the new data made a significant departure from previous methods by estimating industrial and manufacturing production from balance sheet data of both unlisted and listed firms (ministry of corporate affairs —MCA—database). These data are now available on the RBI website. And we infer that as RBI has published these data on its own website, RBI believes in the “accuracy” of the MCA data. So we need to strike RBI off from the list of Cassandras.
What the RBI website states is that the MCA data “have been compiled based on audited annual accounts of 237,398 NGNF (Non-Government Non-Financial) private limited companies received from Ministry of Corporate Affairs (MCA), accounting for 23.3% of population paid-up capital.” In addition, the results pertaining to 16,923 publicly listed companies in the MCA database have also been posted by RBI.
The MCA data shows that the 58,256 unlisted firms in manufacturing, accounting for a third of total manufacturing sales, have been registering close to double-digit growth, and a mid-teens average growth in value-added. The weighted average growth in value-added for both listed and unlisted firms is a healthy 13.4% in FY15. Using IIP data, nominal growth in manufacturing is between 2-4%, with the manufacturing price deflator between -1 and 3%. Now you decide—is the “feel” of growth provided by balance sheet data of over 250,000 firms better or worse than the IIP data covering, on the basis of a survey, the production of a few hundred odd firms? The difference in the feel is a 10 percentage point difference in manufacturing growth depending on whether one believes the MCA data or the IIP data.
What is curious is as to why these experts (and expert journalists) never once decided to investigate as to whether the IIP data were correct. The IIP data are based on the Indian economy as of FY05; in that year, textiles had a weight of 6.2 % in the total value of industrial production, and motor vehicles had only two-thirds of the weight of cars, i.e., 4.0%. I could not find a category for “mobile phones”, but the classification “office, accounting and computing machinery” has a total weight of only 0.3%! The MCA database, by definition, has the “correct” weights in production because they are based on balance sheet data.
Textile volumes have grown at a much lower rate (6% per annum since FY05), compared to a 10%-plus rate for the volume of cars and two-wheelers produced in India. Not to bore you with the details, but the bottom line is that if the IIP data were updated to a FY12 base, just the “correction” for motor vehicles and textiles would add 0.3 percentage points to annual IIP growth.
There is yet another indicator—even the old, outdated IIP data is showing a marked acceleration over the last five fiscal years! In FY12, IIP grew at 2.9%. The next two years, IIP growth averaged 0.5%; in 2014 and 2015, IIP has averaged 2.7%. Given that industry is 30% of GDP, this implies that GDP growth in FY15 and FY16 would be 0.6 percentage points above that of FY13 and FY14, simply on account of higher IIP growth.
The Cassandras have been so pre-occupied with the “feel” factor that they have missed several pointers to an accelerating GDP growth, and one with the right “feel”. When you point out that one indicator of feel—volume of auto sales—grew at a 7% rate in FY16, the highest in the last five years, the doubters just shrug their already drooping shoulders!
So now to a political economy explanation for why the doubters rose en masse, like the phoenix. Let me make it clear—this explanation does not apply to all serious analysts, just a very large majority. The GDP controversy was ignited by the sharp upward revision to GDP growth for FY14—almost a 2 percentage point increase from 4.7% growth to 6.6%. The ruling Congress party had suffered a humiliating defeat in the May 2014 general election (winning only 44 seats out of a total of 543, down from 206 seats in 2009). The common belief or conventional wisdom was that the Congress lost the 2014 election because of two years of slowest GDP growth in more than a decade—4.5% and 4.7% in FY13 and FY14, respectively. Now suddenly, the Central Statistical Organization (CSO) was reporting that these two years averaged 6.1% growth (5.6% and 6.6%, FY13 and FY14). That represented very good GDP growth—so why did the Congress lose so badly?
However, there is an alternative interpretation for the humungous election loss of the Congress—while GDP growth was a factor, I believe that the overwhelming reason Modi’s BJP won a majority in the Lok Sabha (282 seats out of 543) was because of high corruption and even higher inflation under Congress-UPA rule. Congress inherited an average inflation rate of only 4.4% (average between 1998 and 2004). The Congress left office with an average inflation rate of 7.9%. And the average inflation rate for UPA-II was 9.8 %.
By creating doubts about the GDP data, the hawa-makers hoped to capitalise on the structural change in methodology and prove to all concerned that if only the new GDP data had been released prior to May 2014, the UPA would still be in the saddle. Given that it was not, it must be that the new data are wrong! And the feel-gooders argument goes, the new Modi government was not providing any extra GDP growth. Doubter estimates of GDP growth in FY16—according to the old GDP method—place it around 4.5-5 % i.e. the same that was registered by the Congress in FY13 and FY14.
A lot of very smart people bought this snake oil explanation over the last year. Given overwhelming evidence to the contrary, and now with the RBI Good House Keeping seal of approval, perhaps the time has come for the Cassandras to get real.
The authors is contributing editor, The Financial Express, and senior India analyst, The Observatory Group, a New York based macro policy advisory group.