GDP data says investment scenario is improving, but economic indicators clearly suggest otherwise

At its most basic level, the gross domestic product (GDP) of any economy, is basically the sum of private consumption expenditure, investment, government expenditure and net exports (exports minus imports). As far as the Indian GDP is concerned, one of the clear trends to have emerged over the last few quarters is the increase in the rate of investment as well as the investment to GDP ratio. [caption id=“attachment_4135661” align=“alignleft” width=“380”] Representational image. Reuters[/caption] As investments in any economy go up, people end up making more money. They spend this money on goods and services. This benefits other people, who also spend the money they earn. This is how the multiplier effect works and investments lead to a faster economic growth rate. The trend of a higher investment to GDP ratio continued in the GDP figures for the period October to December 2018, which were declared on Thursday. Take a look at Figure 1, which basically plots out the investment to GDP ratio, over the last few years.

What does Figure 1 tell us? The investment to GDP ratio during the period October and December 2018 stood at 33.07 percent, which was a 21-quarter high. At 33.07 percent, investments made up for a third of the Indian economy. On the face of it, as explained above, this should be good news. Also, it is important to see the rate at which investments are growing in comparison to the past. Take a look at Figure 2, which basically plots, the rate of investment growth.

What does Figure 2 tell us? For the past five quarters, the investments part of the economy has been seeing double-digit growth rates. All in all, in a normal scheme of things, this economic evidence should have augured well for the Indian economy. It should have been good news. The problem is that in the recent past, Indian GDP data hasn’t been up to the mark. As per a recent revision, the Indian economy grew by 8.2 percent during 2016-2017, the year of demonetisation. A growth of 8.2 percent wasn’t reflected in high-frequency economic indicators, everything from car sales to bank lending. Does an investment to GDP ratio of 33.07 percent and a growth of 10.64 percent, bear itself out in high-frequency economic indicators, is a question well worth asking. Let’s try and answer this question pointwise. 1) Data from the Centre for Monitoring Indian Economy (CMIE) suggests that the new investments from October to December 2018, fell by 24.14 percent. 2) The completed projects fell by 8.35 percent during the same period, suggests CMIE data. 3) Stalled projects increased by 246.89 percent, suggests CMIE data. All these parameters make it difficult to believe that investment in the economy went up by more than 10 percent, and now constitutes close to a third of the Indian economy. 4) Let’s look at a few high-frequency economic indicators, starting with commercial vehicle sales, which grew by 6.7 percent from October to December 2018. This was the slowest in six quarters. A fast growth in commercial vehicle sales indicates a robust activity on the infrastructure and industrial front. 5) Non-petroleum exports grew by 1.19 percent between October to December 2018. This basically means that the demand for Indian exports has been slow and hence, there is no need for exporters to expand. 6) Steel is an important input in any industrial expansion. The production of finished steel during the period grew by 4.64 percent against 9.06 percent during October to December 2017. Hence, the growth of steel production has slowed down significantly, over the last year. Also, it is well worth remembering, a lot of this steel is going into the government’s road building programme. 7) The consumption of diesel is another important indicator of industrial activity. Increased energy consumption is an effect of increased industrial activity. It’s consumption grew by just 1.67 percent during October to December 2018. It had grown by 4.71 percent during the same period in 2017. 8) Cement is another important ingredient of any industrial expansion. The cement production has been very robust, it increased by 13.33 percent during October to December 2018 against 10.95 percent, a year earlier. This has primarily been on account of the road building programme initiated by the government, along with the focus on affordable housing. 9) Electricity generation increased by 6.35 percent during the period against 2.35 percent from October to December 2017. The trouble is that there is no way of knowing what proportion of this is due to the increase in investment and industrial expansion, and not just increased household consumption. 10) The Reserve Bank of India (RBI) carries out Order Books, Inventories and Capacity Utilisation Survey (OBICUS). One of the things that it measures under the survey is the capacity utilisation of manufacturing industries. During the period July to September 2018, this stood at 74.8 percent. This is an improvement over the recent past. Nonetheless, companies still have a lot of free capacity. In this scenario, on the whole, they have no need to expand. 11) The bank lending to the industry has improved over the last few quarters. The lending to industry during October to December 2018 grew by 4.37 percent, which is better than in the past, but still very slow growth. Once these points are considered, it is very difficult to believe that investment from October to December 2018, grew by 10.64 percent. This again shows why Indian GDP data cannot be taken seriously and that’s not a good thing. (Vivek Kaul is an economist and the author of the Easy Money trilogy).