World Bank India GDP estimate: Eight reasons why forecast must be taken with a pinch of salt
The euphoria over the GDP numbers is a misplaced triumphalism as they do not in any way reveal a sustainable revival in Indian economy
World Bank estimated that India's GDP is expected to grow at 7.3 percent in 2018-19. The estimates given in Global Economic Prospects (GEP) report obviously kicked off a major political storm with the ruling party claiming that the critics of demonetisation and GST have proved wrong and economy is on the recovery path while the opposition calls it a bluff. The World Bank further estimated that the GDP will further grow at 7.5 percent for the next two years.
The critics may argue that the World Bank's numbers are only a projection. The economic analysis should be fact based and empirically sound. But the country's GDP grew at 6.3 percent in the second (Jul-Sep) quarter of the current fiscal. This is much higher than the three year low of 5.7 percent in the Apr-Jun quarter of this financial year. Thus, the World Bank projections are defended on the experience of the second quarter as compared to first quarter.
1. But, what has been the experience with these predictions in the past. Of the leading developing economies, India performed less strongly than what has been predicted by the World Bank in June 2017. Thus, the World Bank projections should be taken with a pinch of salt.
2. Agriculture accounts for nearly half of India's livelihood opportunities. Despite euphoria over the GDP numbers, the agrarian distress continues to haunt the nation thus dampening the rural sector. It may be recalled here that Vajpayee led NDA government lost the polls in 2004 despite high profile campaign of 'India Shining' essentially due to wide spread rural distress. Despite a normal monsoon, the growth in agriculture and allied sectors declined to 1.7 percent in the second quarter from 2.3 percent in the earlier quarter. A year earlier it was 4.1 percent indicating the extent of deceleration in a sector that determines the rural incomes and the household consumption expenditure of more than half of India's population.
3. Similarly, kharif foodgrain production contracted by 2.8 percent in 2017-18 when compared with 10.7 percent expansion in the year earlier. Such a contraction in food grain production would result in higher food grain inflation. Coupled with the lowering rural incomes due to slow down in agriculture, higher food grain prices indicate an impending crisis in India's villages. Higher food prices disproportionately hit the poor who spend most of their monthly per capita expenditure on food consumption.
4. India's domestic demand is the critical component of the nation's growth story. There cannot be any growth without rise in domestic consumption as India is not primarily an export driven economy. But, the household consumption expenditure stagnated around 6.5 percent in the first two quarters of this fiscal. It was 7.9 percent a year earlier. Such a drastic fall in domestic demand does not augur well for growth buoyancy.
5. The macroeconomic indicators are also not so strong thus incapacitating government to initiate fiscal and monetary measures to stimulate growth. This government was in fact blessed by lower global oil prices ever since it took office. But, the government no longer enjoys the luxury of sluggish global oil prices. The fiscal deficit at the end of October has already reached 96 percent of the budget estimates for the financial year 2017-18. Thus the fiscal deficit would be much higher than anticipated by the end of this fiscal indicating the precarious nature of public finances.
6. The higher growth rate in the second quarter of this fiscal as compared to the previous quarter was mainly fuelled by the impetus in the manufacturing sector. But, the Central Statistical Office (CSO) data reveals that the Index of Industrial Production (IIP) was at 2.2 percent for the October month. This cannot be touted as real revival of the economy. Yet, the gross value addition (GVA) in the manufacturing sector revealed a significant turn around in second quarter. This is in comparison with the much lower base in the previous quarter. In short, the economic growth story cannot be built around such statistical illusions.
7. More than 70 percent of the manufacturing growth rate is calculated based on the growth data provided by the listed corporate entities. But, India's real story is in the informal and unorganised sector. These are the sectors which along with agriculture were most hit by the adverse impact of demonetisation and the GST.
8. The story of jobs is much more painful. The latest report of the Centre for Monitoring Indian Economy (CMIE) reveals that people have low hopes on finding jobs. India's Labour Participation Rate (LPR) is low by international standards. It has fallen from 47 percent in January, 2016 to less than 44 percent in December, 2017, says the CMIE 's latest report updated on its web site.
The global average LPR is 63 percent, China has a LPR of 71 percent. The low and falling LPR in India is established by three independent surveys including that of National Sample Survey Organisation (NSSO). The NSSO is an official statistical agency.
Thus, the euphoria over the GDP numbers is a misplaced triumphalism as they do not in any way reveal a sustainable revival in Indian economy. Thus, the World Bank estimates are more to do with cheering Indian policy planners to undertake more liberal reforms rather than testifying the country's economic recovery.
For full coverage of Union Budget 2018, click here.
(The writer is a former MLC in Telangana, editor of The Hans India, professor in the Dept of Journalism, Osmania University)
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