New item numbers: Delightful but unreal
by Virendra Parekh on 16 Feb 2015 0 Comment

Economy watchers are a baffled lot these days. The latest GDP series has caught them completely off-guard. They believed for years that the Indian economy had entered a prolonged slowdown in 2011-12. This was indicated by the gross domestic product (GDP) numbers and what almost everyone, small or big, found to be largely consistent with his particular business or livelihood pattern.


The new official numbers have changed the dismal picture radically. Till now, we were told that GDP growth was 4.7 per cent in 2012-13 and 5 per cent in 2013-14, a toxic decline from the heady years of near-double-digit growth. The CSO now says that GDP growth in India was 5.1 per cent in 2012-13 and a miracle growth rate of 6.9 per cent in 2013-14. In the current year we are growing at an enviable 7.4 per cent (not the measly 5.5 per cent expected earlier), surpassing even the dragon next door. Another cheerful news is that, having become richer, Indians now spend a smaller part of their income on food. This gives rise to the question: Is the Indian economy as badly off as we assumed?


The revision is based on change in the base year from 2004-05 to 2011-12, the movement to market prices from factor cost, new data for manufacturing, segregation of crop and livestock production, estimation of value addition from the extraction of sand, the inclusion of accounts of stock brokers etc.


If the new figures present a correct picture then both the Finance Minister and the RBI Governor can take their jobs a little easy. RBI Governor Raghuram Rajan can take his time to cut interest rates since the economy is doing quite well even without his help. And Arun Jaitley need not burn midnight oil over any fiscal stimulus for growth through additional public investment, since growth is already quickening.


These numbers are no doubt delightful and UPA spokespersons have been quick to claim credit. But there is an uneasy air of unreality around them. To be sure, data and methodological revisions are undertaken by all countries, and developing countries like India undertake these revisions on a larger and more frequent scale.


But the fundamental problem with the new numbers is that the macro data have little connect with indicators on the ground such as the Index of Industrial Production (IIP), credit growth, company earnings, the level of non-performing loans, car sales and so on. Each of these presents a dim and grim picture of the economy.


Take, for example, the manufacturing sector. The new series shows a growth rate of six per cent for 2013-14 compared with -0.7 per cent in the old series, after a 6.2 per cent growth in 2012-13 (the old series shows 1.1 per cent). However, this is not reflected in the top-line growth or the margins (a proxy for value addition) of the bigger companies. If productivity has improved leading to a higher gross value addition, surely it should be reflected in corporate profits and tax collections?


In a policy paralysis year, with bank balance sheets broken, and ease of doing business worse, there was a surge in investment activity? As to the current year, when there is a complete decimation of pricing power (core Wholesale Price Index inflation is at around one per cent) and corporate capacity utilisation languishes at around 70 per cent, how can we believe that industry is surging ahead?


The CSO argues that the “unincorporated” sector introduces the swing factor. However, this does not tally with the fact that small scale industry (the closest cousin of the unincorporated sector) continues to be one of the key contributors to bank non-performing loans. RBI data for 2011 and 2012 show that NPAs of micro and small enterprises grew sharply at 24 per cent. The rate of slippage has slowed down since then, but if CSO is right, why have banks not seen it in their loan service patterns?


There seems to be a similar error with regard to the government consumption expenditure i.e. expenditure for teachers, hospitals, government workers’ salaries etc. When finance minister P Chidambaram went on an expenditure cutting spree in 2013-14, it was precisely these expenditures that he was reducing. Yet the new CSO data suggest that real government expenditures accelerated from only a 1.7 per cent growth in 2012-13 to an 8.2 per cent growth rate in 2013-14. The earlier data showing a deceleration in real government consumption expenditure from 6.2 per cent growth in 2012-13 to 3.8 per cent growth in 2013-14 appear to be more credible.


We need a longer series (say 2001-11 or 2011-20) before we can use these numbers in policy formulation. Such a series will permit comparisons over a period, establish linkages among variables and determine where the economy currently is in the business cycle - at the crest, trough or in a rising or falling trend. Without this, all that can be said is that the economy is recovering.


A man does not become taller by measuring his height in centimeters instead of inches. The same goes for the economy. Both the Finance Minister and the RBI Governor should remember this while formulating their policies.   

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