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Trying to make sense of India's startling GDP numbers

February 20, 2015 14:24 IST
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The fundamental problem is that the macro data have little connect with indicators on the ground, says Abheek Barua.

Image: Macro data have little connect with indicators on the ground. Photograph: Reuters

Life as an applied economist has perhaps never been so difficult.

The baffling upward revision in growth data that shows the economy in the pink of health (at least relative to the rest of the world, having grown this fiscal year at 7.4 per cent) has thrown the neat little stories of the massive slowdown of the past couple of years and its remedies out of the window. 

One grants the fact that this is due to what the chief statistician of the country blithely refers to as "structural change" - the base year has been changed, the gross domestic product (GDP) metric itself is now in sync with global norms and is being measured at market prices, a much larger sample of companies to measure industrial growth, and so on and so forth - but that doesn't quite assuage the harried economist's woes. 

The fundamental problem is that the macro data have little connect with indicators on the ground, be it the Index of Industrial Production (IIP), credit growth, company earnings, the level of non-performing loans, car sales - I could go on.

I know this is utterly tasteless to make this comparison, but this is the Indian statistical service's version of "holocaust denial".

All bets, forecasts and analyses are off - the new series of GDP is pitiably short and the Central Statistical Organisation (CSO) has not bothered to help the analyst out by offering long parallel series that could enable systematic comparison and benchmarking. 

Image: Despite the high growth rates, the absolute value of GDP is lower than forecasted. Photograph: Reuters

There are a number of issues that follow. I think there would be legitimate questions raised by overseas analysts and investors about the credibility of Indian data (there's enough of that already, given the jumpiness of indices like the IIP).

Thus, we ascend the dais - previously occupied almost solely by China (oh, happy day!) - of countries whose macroeconomic prints are often taken with a generous fistful of salt. 

The poor Indian policymaker is also likely to find himself in a quandary. I believe that both the Reserve Bank of India (RBI) and the ministry of finance are too smart to go by the GDP print alone and would perhaps base their judgement on a variety of other indicators. But there is a limit to which they can afford not to acknowledge a number as important as GDP and headline growth will certainly have a bearing on policy choices.

I am sure the jumpier of my brethren in the economist community are paring down their forecasts of policy rate cuts for this year. Ironically enough, the finance ministry faces another problem.

Despite the high growth rates, the absolute value of GDP is lower than forecasted when the Budget was announced - thus, there's likely to be a challenge to get the fiscal deficit in line with forecasts. 

The analytical or intellectual challenge, at least from me, is to associate the same levels of depressed economic activity on the ground with much higher rates of growth.

One way to do this would be to establish a mapping between the new series of GDP with the old and slowly sensitise the earlier forecasts to the new series.

But this cannot be done on the basis of the scanty data (from 2011-12) that we have. My appeal to the CSO would be to release a longer series or the so called "linking factors" for the new base, so that a more solid relationship can be established. 

Image: New series shows a growth rate of six per cent for 2013-14. Photograph: Reuters

A lot of the recent discussion on macroeconomic policy has revolved around the "output gap" and the potential output of the economy.

Seeing the complete decimation of pricing power (core Wholesale Price Index inflation is at around one per cent) and corporate capacity utilisation that languishes at around 70 per cent, the majority of economists believe that there is a negative output gap - that is, growth is well below potential output.

Based on the earlier series of GDP data, economists grudgingly admitted that the potential output growth was at best between 6.5 and seven per cent. With the new series showing a print of 7.4 per cent, potential output growth seems closer to 8.5 per cent than 6.5 per cent. 

The other problem with the data is not so much revised and expanded coverage of the economy as it is with the growth rates that the new aggregate records. Take the manufacturing sector, for instance.

The new series shows a growth rate of six per cent for 2013-14 compared with -0.7 per cent in the old series. This, after a 6.2 per cent growth in 2012-13 (the old series shows 1.1 per cent).

Image: Growth is well below potential output. Photograph: Reuters

I would argue that neither the top-line growth nor the margins (a proxy for the value addition) could explain this for the bigger companies if someone bothers to look at their balance sheets.

Activities such as marketing (that theoretically add "value" that GDP ultimately measures) could not have changed so dramatically as to push the growth rate of value addition up so sharply. 

The CSO then argues that the "unincorporated" sector introduces the swing factor. Does this quite tally with the fact that the small scale industry (the closest cousin of the unincorporated sector) continues to be one of the key contributors to bank non-performing loans?

The data for micro and small enterprises for 2011 and 2012 from the RBI show that these non-performing assets grew sharply at 24 per cent.

While the numbers for the sector are sparse after that, I would be curious to know what, if the CSO is right, triggered a turnaround, since banks for one haven't quite seen this in their loan service patterns. 

It would be naïve to interpret this data as a victory (as some United Progressive Alliance leaders have been quick to do) for the last government's economic policies towards the end of its tenure.

The problems that became acute towards the last couple of years of this tenure remain and need to be resolved. I would only hope that our policymakers take the right cues. 

The writer is a consultant at Icrier, New Delhi. These views are his own.

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