The GDP growth numbers have ceased to excite the market even if they appear to look good, though can spook them in case they come below expectations. This is so because there is a disconnect between what is happening at the ground level and these numbers, and few participants find the numbers under the new methodology convincing even though it is aligned to global practices. Yet the number of 7.6% is good more so because it is at the same level as was projected in the advance estimates.
The problem with these forecasts and estimates is that they tend to be revised at least twice a year and often come at a lower level finally. For price indices they come in higher! In fact, the only data set which is stable is that of the RBI, which is less susceptible to change. All other data series on prices, industrial production, trade etc. do tend to change and hence remain unstable. At times, it can lead to contrary conclusions as the new GDP series have shown for FY14.
Now let us look at these numbers. If we look at the physical economy and the indicators that have been available during the year this is how the picture looks. Agriculture has been a non-performer with both the kharif and rabi crops being affected by the drought and subsequent weather conditions. Output has been lower for almost all crops like rice, coarse cereals, oilseeds, pulses and sugarcane relative to last year.
The index of industrial production, which is a measure of physical production in this sector, has witnessed nominal growth of 2.0% which is lower than that last year. The government has met its commitment on capex last year at Rs 1.3 lkh crore. There has been a lot of focus on roads this year by the government and the contracts have been awarded for the same. The banking sector has been in trouble with high NPAs and low business growth levels with deposits in particular registering one of the lowest growth rates. Inflation has been coming down due to the softening of commodity prices.
The GDP growth numbers are, however, not aligned with this scenario. They are based on gross value added numbers which are reckoned in value terms based on 2011-12 prices and include net indirect taxes under the new methodology that is being used. Agriculture has witnessed positive growth when physical output has declined. Manufacturing value added showed 9.3% growth when physical production lagged at around 2%. The usual reason given is that we are producing smaller number of goods, but these products have higher value addition. For example 10 small passenger vehicles is equivalent of 1 high end car and hence while we may be producing fewer low end cars, the high end product delivers higher value. The mining sector witnessed high growth of 7.4% in GVA though the physical sector witnessed just 2.2%.
Construction showed growth of 3.9% which looks very low compared with what has been projected on the infra side. With a lot of focus being given to the roads space, growth should have been more impressive and been lower by 0.5% over last year. What exactly is the scene here then?
With construction growth being low, the real estate segment led the growth in the financial sector which does not gel with this picture. The distress in banking does not get reflected in these numbers. The trade, hotels and transport & communication sector realised growth of 9.3% though physical production was low.
So how do we interpret these numbers? It should be done with caution and it can be said that there has been an improvement over last year. The 7.6% number cannot be used as a proxy for fast-track growth as they appear to look too optimistic under this method which is still puzzling. One may recollect that in 2013-14 when the old methodology popped up a number of 4.7%, while the equivalent was 6.6% under the new system.
The broader question is whether GDP really indicates overall improvement in the state of the economy or whether it is just a statistical number. Quite interestingly the UN's latest hunger index shows that there are still close to 195 mn people in India who are afflicted by hunger in a sum of 795 mn in the world. This is an improvement over 1990 when there were around 210 mn in a total of 1 billion. However if we contrast them with China the picture is more drastic there where it came down from 289 mn to 133 mn during the same period.
This picture is quite disappointing because it means that while China has been able to lower the headcount under hunger by 156 mn in around 15 years, we have managed only 15 mn or 10% of what has been achieved by China. Further, what is more disturbing is that our share in world hunger has gone up from 21.5 to 24.5%.
While these numbers may not be germane to the discussion on GDP, the point is that a high GDP growth number may not mean much if it does indicate any major sign of development. Hence saying that we are the fastest growing economy is a statistical fact, but does not reflect the quality of growth. Couple this with the anomalies even within the calculation of linking the physical and value added components, and the concept of GDP looks shaky.
Globally too there is a lot of scepticism of using GDP as a leading indicator as it does camouflage the qualitative aspects. The so-called jobless economic growth concept is well documented these days. For countries like India it is the development part, while for China it is the huge build-up of NPAs while the euro nations had the sovereign debt overhang. Comparing the same numbers across nations may look alluring, but could be hasty. For policy formulation, we do need to look at other parameters than a blind focus on GDP growth.
The writer is chief economist, CARE Ratings. Views are personal
Updated Date: Jun 01, 2016 17:08 PM