As far as India’s growth and reform-promises are concerned, Prime Minister Narendra Modi is clearly fighting a huge trust deficit internationally. This is more than evident from the latest report on ‘Investment Climate Statements for 2016’ by US State Department that described India’s 7.5 percent Gross Domestic Product (GDP) growth rate as “overstated”. This comment came shortly after Morgan Stanley Investment Management’s Ruchir Sharma too warned that the country’s GDP data is overstated as it lacks the critical boost from private sector investments and is largely shouldered by government spending.
The mounting skepticism from world’s largest economy and a financial sector giant that manages billions of dollars worth investments worldwide should ring a warning bell to PM Modi. The reason is simple: a low growth scenario is more of an acceptable proposition to India rather than the world beginning to doubt its official growth data. That wouldn’t augur well for an economy desperately looking for fresh private investments since large investors would question the very credibility of the economy.
All subsequent data releases will be seen with an element of suspicion. India would not want such a situation to arise. This is where the central bank plays a crucial role since its voice will have more credibility than the political leadership. It is also a reminder to Modi why he should find a credible face to succeed Raghuram Rajan at the RBI.
As per the official data, India’s economy grew at 7.6 percent in the fiscal year 2015-2016, the fastest among the world’s major economies. At 7.9 percent, India even beat China that grew 6.7 percent in the Jan-Mar quarter of 2016 giving a boost to the Modi government and adding colour to the Prime Minister's numerous foreign trips.
The doubts over the GDP numbers started when India revised its GDP calculation methodology in January 2015 and the base-year for calculation. The revision of base year to 2012 from 2005 and the shift to a market-price-based model instantly pushed up the 2014-2015 GDP growth to 6.9 percent from 4.7 percent under the old methodology. Besides, Sharma, many prominent experts including Rajan and chief economic advisor, Arvind Subamanian, too had raised concerns on the way GDP is calculated.
In fact, there is nothing wrong with the new methodology based on the market prices. That’s how internationally growth is assessed by many developed countries. The new model was brought in to factor in more data from the corporate sector, household spending and informal sector movements. But, the widespread skepticism began on account of a huge mismatch between headline GDP numbers and an array of high-frequency growth indicators such as factory output, bank credit growth and tepid growth in the manufacturing.
Seeing the two together — high GDP numbers and poor data on the ground--- an observer will have questions on what is correct. That is logical. But, it’s a must that Modi just address the growing trust-deficit before more people shout from the roof that India is “overstating” the numbers. Clearly, India is not in a situation to simply ignore such skepticism for long like China, where every other data release is dodgy.
The government could begin with offering the back series data for GDP for two decades or so. Presently the back series data is available only till 2011-2012. Economists believe that this data should be made available for at least 2-3 decades to get a clear picture. The second important aspect is the old base of Index of Industrial Production (IIP) data, which still has 2004-05 base. There is no reason why the government shouldn’t revise it to 2011-12, the base year used for GDP calculation.
Having said that, there are several positives for the Indian economy compared with its peers such as healthy fiscal deficit situation, high foreign direct investment (FDI) inflows, stable exchange rate, a majority-government at the centre and a strong demographic dividend. The combination of these has the potential to put India on the higher growth trajectory. But, as always is the case, the flaws are looked at first.
The US economy’s situation itself isn’t best at this stage as the economy is fighting global slowdown and the painful process of gradual unwinding of its easy monetary policy regime. Unseen problems are brewing in China that could potentially translate to a major crisis at any stage. UK is fighting uncertainty post its exit from the European Union.
Other emerging markets, such as Indonesia have severe constraints on infrastructure and corruption. India stands relatively better. To be sure, the US has acknowledged India’s achievements too, including the series of economic reforms, in particular streamlining bureaucratic decision-making and raising FDI limits in certain sectors.
But, the second observation from the US that PM Modi’s government has been “slow” to match its rhetoric on economic reforms is equally serious and something the BJP-government should take cognizance with due importance. This should remind the government why it should be even more vigilant in passing the Goods and Services Tax (GST) Bill. Land is more or less a state subject now and other financial sector reforms are progressing, albeit, slowly.
One can debate the facts in US’s India GDP observation. But, the message to Modi is clear. The PM is fighting a trust deficit.