Don't cheer the new GDP data yet, India has not recovered in a big way

The GDP growth numbers released for FY15, which comes from a new methodology, is quite difficult to assimilate. On the face of it, growth at 7.4% is higher than that in FY14, which was 6.9%. This means w that conditions are better than they were last year. This is a feeling which almost all have at the ground level. But projections of the RBI and the Ministry of Finance were around 5.5% under the old definition compared with 4.7% in FY14. Now do things really look more delightful?

When one tries to juxtapose these  impressive numbers with what is happening at the ground level, it is not always easy to match the same. The fact is that when the GDP growth number goes below 5% on a continuous basis it causes concern. And also we are used to interpreting any number above 7% with applause and above 8% with exultation. Therefore, a number of 7.4%, which signals probably 8% growth in FY16, does raise questions considering that we were all expecting the magic number of 8% at least 3 years down the line.

To begin with the CSO, which brings out these numbers, has clarified that GDP is based on value added at market prices which broadly refers to returns to the factors of production. In terms of balance sheet language, gross profits before interest, depreciation, tax and profit plus salaries and wages would be gross value added adjusted for net indirect taxes. This is hence different from physical production of any sector.

Therefore, while manufacturing growth is at 1.1% for the first 8 months, the projection of growth in GDP (GVA or gross value added to be precise) from this sector is 6.8% which comes on top of 5.3% in FY14. It looks unlikely that the IIP growth number can actually reach this level. In this case with absolute production not growing much, one must conclude that productivity has increased sharply to generate this additional value. Prima facie it is hard to digest this fact. Even corporate results this year have not quite been y buoyant.

A similar picture emerges for agriculture where growth in GVA is to be 1.1%. Given that the Ministry of Agriculture has declared that the kharif crop would be lower this year relative to last year and that rabi sowing is lower across all crops this year, it implies major improvement in farm productivity.

The same holds for the financial sector which is to grow by 13.7%. Now given that bank business has been stymied by low growth in deposits and credit under the yoke of high NPAs and restructured assets, it appears hard to believe that the other segments like stock markets, real estate (which is also struggling) and professional services (which are of small magnitude) could really be pulling the sector along.

This really raises a question of how do we interpret these numbers? The methodology has been changed which has added a lot of bounce to the lackluster GDP numbers in FY13 and FY14. From a struggling and stagnant economy we are now told that we have taken off in FY14 and are on the upward path that we have been dreaming of all this time. Based on this trend, touching 8% next year does not look unlikely. Yet there is no enthusiasm in the economy.

Capital formation continues to decline in the last 3 years which means that investment has come down. RBI data shows that capacity utilization has remained unchanged at 70-72%. Consumer goods still face inadequate demand as households are not spending. Companies are not borrowing and the stalled projects have not restarted operations. The government has announced cuts in expenditure to maintain the fiscal deficit ratio at 4.1% of GDP. Again there is a contradiction here with the GDP data which comes from the administrative and social services which show buoyancy. In such a scenario, where is growth really coming from?

In fact, curiously, the overall size of nominal GDP remains on par with what it was under the earlier calculations, which means that the size of the cake has not changed much due to the concept being reckoned on a new base year and at market prices. We have changed the composition within by adding back taxes to the concept of GDP which has brought this number up to different levels.

Hence, while the GDP numbers and concept cannot be faulted and have to be accepted as this is the international norm and that future numbers will be on similar lines, it may not be concluded that the economy has recovered in a big way. As the series does not give extrapolations for past years, it is just not possible to explain growth in relative terms with the years before FY12.

In the same length, the data cannot be considered to be incorrect as it is based on a sound definition which is what is used in a global context. We will have to work on this basis as such inflated numbers could be the order. However, to interpret it as India being now a faster growing economy than China may have to wait for some time especially so since the fundamentals have yet to show a significant turnaround.

It would however be interesting to see how the RBI or MOF view these numbers for policy formulation. If growth is really this high, then the RBI should not be in a hurry to lower rates to spur growth. If growth is really this high, the government should not be compromising on FRBM to spend more in infrastructure. This becomes ticklish now.