“Things remain what they were and are now. But we are told that, if numbers are computed properly, the Indian economy did not do as badly as we all thought.” – Virendra Parekh
Once upon a time, Indian Railways had three classes: first, second and third. Unable to bear the plight of the hapless passengers in the third class, a bleeding heart minister abolished the second class one fine morning and renamed the third class as second class. Everything else remained the same, but at one stroke of pen he upgraded millions of passengers at no cost to them.
Something similar is happening about our economy. Things remain what they were and are now. But we are told that, if numbers are computed properly, the Indian economy did not do as badly as we all thought. So, cheer up!
The 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 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 in his particular business or livelihood pattern.
But 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 Central Statistical Organisation (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 modest 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 the UPA spokesmen 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 do 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 the 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, was there 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 industry capacity utilisation languishes at around 70 per cent, how can we believe that the industry is surging ahead?
The CSO argues that the “unincorporated” sector introduced the swing factor. However, this does not tally with the fact that the 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 the 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 long 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 an upturn or downturn. 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 economy, too. Both the finance minister and the RBI governor should remember this while formulating their policies. – Vijayvaani, 15 February 2015
» Virendra Parekh is the Executive Editor of Corporate India. He lives in Mumbai.