Statistics as wish-fulfilment: Why the new GDP numbers are from La-La Land

Like dreams, statistics in India are a form of wish fulfilment. This is particularly true of numbers and statistics on nebulous concepts like the country’s economic growth. Measuring total economic activity in a vast, underdeveloped economy with a large informal sector, a substantial cash economy, difficult-to-understand interactions between households, corporates and government, with external factors thrown in, and a shaky government apparatus that does the measuring, is always quite a task.

More so when the chief generator of those numbers – the government - has the biggest incentive to lie about them. There’s simply too much invested by India’s policy-making elite and the financial markets in the wish for high growth rates to have inconveniences like numbers intrude on the aspiration.

For all these reasons, the quality of government statistics was bound to be all over the place. One sees the way the previous government fixed its numbers on exercises like the fiscal deficit. Mind you, the budget is an exercise that takes place in the full glare of local and international scrutiny. Yet previous governments have fudged, and fudged big time at that. The financial fraternity in the past has solemnly intoned that there is concern about the “quality” of deficit reduction. This is funny. Speaking truth to power does not come easily to such people at all. Why didn’t they just come out and say it was a bloody cook up ?

Now imagine a vastly more complex analytical exercise that takes place far away from the disinfecting sunlight of public scrutiny, where a bunch of underpaid, understaffed, and overworked government statisticians - answering to political masters - produce that magical number of 7.5 percent GDP growth, which is this country’s latest quarterly GDP growth print (January to March 2015). Yes, the magic number comes from something called Mospi, the Ministry for Statistics and Programme Implementation, and is generated under the conditions mentioned above. In charge is a retired army chief, Gen VK Singh, who we are sure is a competent and capable general, but Mahalanobis he is not.

Incidentally, that magic figure - indicative of the return of breakneck economic expansion - is also the highest among the world’s major economies, and some airy conclusions in the media are that it even surpasses China’s growth rate.

So is India’s latest quarterly GDP growth rate really 7.5 per cent? There are two kinds of statistics, the kind you look up and the kind you make up. Does the growth rate belong to the second category and is that made up growth rate being looked up by the chattering classes ?

Mind it Rascala !….. and then Markit

The total GDP comes from four components of economic activity. Services, industrials and manufacturing, mining, and agriculture. This is the traditional breakup of GDP by sector. There’s only one issue here. None of the components are really growing. In some cases, they’re actually contracting. If that is the case where on earth does that magical figure of 7.5 per cent come from ?

Consider each of the components in turn from other available indexes.

Services is supposed to be the biggest sector of the economy. More than half of it in fact. Till very recently, there was no reliable measure to capture services growth. Now HSBC, with Markit Economics, come out with the HSBC India Services PMI. This is an index that captures services growth in the economy. Indications of over 50 suggest expansion, below 50 indicate contraction.

The methodology is international and sound, but judging the actual inputs into the index and their collection is difficult from the outside. Besides, the index is barely two years old, and judging reliability without a historical track record is difficult. Seasoning will be required. Nevertheless it is an indicator. Now, gentle reader, the Services PMI has been mildly up during this period with readings of 52, 54, and 53 for the March quarter. Adequate, but certainly not enough to signify the breakneck expansion the GDP figure indicates. In fact, its latest print for May comes in at 49.6, indicating contraction. This is enough to make one fall off the chair. It indicates the economy fell off a cliff between 31 March and the May reading, a rather bizarre conclusion.

Now come to manufacturing and industrials. Here we have a venerable number - the famous IIP. This gyrates more than a Turkish belly dancer. The reason apparently is the capital goods component. But it is a large time series and goes back many years. The IIP, as is well known, is also muddling along, coming in at low single digits during this period.

That brings us to mining. Alas, also flat to negative during this period with growth readings of -2, 1.88 and 0.9 during the three months in the quarter. This is from Mospi’s own time series. Anecodotal evidence gathered from surveying the balance-sheets of the companies that make up the mining sector and talking to analysts also reveals a dismal story. Apparently the reasons here range from Supreme Court verdicts to tribal agitations to what have you. Just ask Anil Agarwal of Vedanta for his opinion. Off the record, of course.

Collectively, therefore, these three sectoral components of GDP make up about 87 percent of all economic activity. And they’re all flat or shrinking. This is really funny.

Then that old workhorse – agriculture. Agriculture is growing at about 2-3 per cent. High school algebra would tell you that this confirms the points made on the rest of the sectors. It’s simply not enough to justify that GDP growth figure.

As an aside, agriculture is another example of statistics as wish fulfilment. Sometimes the monsoon, as a force of nature, works out, and sometimes it does not. Either way, practically every statement from economic managers and market participants will justify the wish for higher growth rates. When the monsoon fails, the refrain is that it doesn’t matter, because agriculture is only a small fraction of the economy. When the monsoon succeeds, then it has come to rescue. More wish fulfillment.

Also, going forward, even if the weather gods smile and the heavens pour, it would still not be enough to explain these sky high growth rates. Agriculture now accounts for just 13 per cent of the economy.

Triangulate, Triangulate, Triangulate

So how to make sense of all this? Triangulating with other more reliable indicators might help, and is often done. One way to do so is with corporate top and bottomlines – aggregate corporate sales and profits. They’re also audited and relatively more difficult to fudge, especially with the big boys who account for most of them. The problem is that the GDP figure is a real figure, but corporate sales are nominal - i.e. not adjusted for inflation. The solution is to convert that real GDP figure to a nominal amount and compare it with corporate sales and profits.

So take the real GDP growth rate of 7.5 per cent and add the inflation rate of about 6 percent to it. This gives nominal GDP growth of 13 percent or so. Corporate toplines should grow roughly at the same rate under the reasonable assumption that corporate sales are not produced on Mars or Jupiter but in this country. Using that produces another shocker. Corporate sales growth for the quarter is near zero, nowhere close to the 13 percent figure that the growth in nominal GDP would predict. Comparing corporate profit growth rates (deeply negative) with nominal GDP growth rates is even more scandalous ; but here we have the consolation that huge one-time write offs from companies like Tata Steel or Vodafone artificially lower corporate profits and ruin the comparison anyway. Another way of triangulating comes with electricity generation. Under the assumption that for any economic activity electricity is like air - after all making anything requires electricity - keeping an eye on electricity output is important. Since electricity is a real figure comparing it with the real GDP growth rate of 7.5 percent makes sense. Here again growth in electricity generation is in low single digits for all three months of the March quarter, less than half the GDP growth rate.

One reason for this state of affairs is the chronic shortage of government statisticians. That august body, the Indian Statistical Institute - the only source of top statisticians in India - sees most of its bright students go to America. Others join the private sector where incentives and pay packets are presumably larger. As a result, close to a quarter of all posts for government statisticians are running vacant.

So, dear reader, where is that wonderful 7.5 percent growth rate coming from? Well, the beauty about Indian economic statistics is that they are a moveable feast. You can use them at any time and in any way to prove your point. Take your pick and prove any point you wish to prove and enjai. When your correspondent raises these contradictions, pat comes the response. “OK, but what about the black or unaccounted for economy. Then there’s the unorganised sector. Have you taken that into account?” This response is guaranteed to make anyone scratch his head and go back to reading Asterix comics.

Adil Rustomjee is an investment adviser in Mumbai. Comments are welcome at a_rustomjee@hotmail.com .