Opinion | Recent economic growth could not have exceeded 6%
4 min read . Updated: 19 Mar 2019, 09:35 PM ISTThe new series overestimated growth in all years except 2015-16 by an average margin of around 1.3%
The Indian government has been defending its record on economic management over its term, claiming that India is the world’s fastest-growing major economy at an annual rate of 7% or so over the past several years, with a dip below that level last year. Data on employment that shows a rise in joblessness has been rubbished on the argument that with such high growth, a decline in employment is not imaginable. In all discussions on economic performance, government officials cite buoyant gross domestic product (GDP) figures, even though other indicators—on trade, investments and indices of physical output—have all clearly been in decline.
But how good is the claim of 7% growth after the method by which GDP is calculated was changed in 2015? While the earlier emphasis of the calculation was on final output figures, the new series marked a shift to value addition. This has thrown up a discrepancy between the old series of GDP data and the new for their overlap period from the second quarter of fiscal 2011-12 to the third quarter of 2013-14. By the old series with 2004-05 as base year, India’s economy grew by a mere 5.4% per annum on average during this stretch, but the new series (GVA11-12) showed a rate of 6.7%.
The difference has yet to be reconciled by professional statisticians.
It is not as if the revised figures did not face scepticism. In early April 2015, the Reserve Bank of India (RBI) questioned the validity of the new series in light of other data, including the investment rate, the rising number of stalled projects, and the decline in savings. The central bank noted the large wedge between the growth rates of manufacturing in the new series and the Index of Industrial Production. It stated: “Growth rates of both nominal and real GDP on the new base are higher for each year. In terms of commonly used indicators of productivity—the incremental capital output ratio (ICOR)—the new series reveals a significant improvement, but this is not corroborated by the behaviour of other indicators, especially in an environment characterized by declining national savings, investment and general concerns about stalled project."
Indeed, every quarter has had a gap, with the previous quarter’s difference being almost 10 percentage points (annualised).
Extending the old GDP series into the period where there is no overlap presents an interesting opportunity to test the claims of the government, both independently and directly. We model the old GDP series as a function of output indicators such as indices of industrial production, exports and net sales of service companies in the Centre for Monitoring Indian Economy database, besides credit and inflation rates of subcomponents of the Consumer Price Index, to get an alternative estimate that goes well beyond the overlap period. In agriculture, though, we retain the new estimates.
The contrast thrown up by the analysis is striking. The new measures had underestimated manufacturing to the extent of 4% (last year; a less reliable figure) and also overestimated this sector’s growth by as much as 9% over the previous years.
Overall, the new series overestimated growth in all years except 2015-16 by a margin of around 1.3% on an average (much the same as in the overlap period).
Going by growth rates of the older GDP series extended, it is highly unlikely that India has maintained as high a growth rate as 7.2-7.5% over the last several years. Barring 2015-16 and 2016-17, when growth had |possibly picked up only to be dashed by demonetization and other quixotic initiatives of the government, growth has most likely been under 6% and closer to 5-5.5% over the Modi years thus far. These estimates are consistent with other indicators like employment, exports, and the sagging growth rate of capital formation, all of which should worry the government despite its brave face on growth. Did errors in the new series mislead the government into being complacent?
Manufacturing sector growth may have been very low, except apparently in the last three quarters, which may reflect a partial bounce-back from the effects of demonetization. The poor performance of the manufacturing sector would mean that many well-intended initiatives of the government, such as Make in India, may have lacked the strategic coherence required to make an impact. Beyond the slogans, there has hardly been any consistency across trade agreements, tariffs, industrial, credit and macroeconomic dimensions of policy towards manufacturing. Thus, in the period from 2012-13 to 2016-17, manufacturing GDP growth may have averaged as low as 2.3% per annum, rising briefly in 2017-18 (three quarters) to 8% or so.
The inability of the government to carry out important economic reforms like implementation of the Goods and Services Tax and ensure better tax compliance without hurting aggregate demand in the economy has been its core problem.
Meanwhile, RBI’s attempt to tackle supply-side “inflation" and the credit market collapse would have contributed to the loss of economic momentum, despite the government’s success with Bharatmala and other infrastructure projects in enhancing spending. Mercifully, the central bank has begun easing monetary policy, which should have been done at least three years ago. But, unfortunately for the Modi government, its positive effects may begin to show up only after the elections.
Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan’s previous Mint columns at www.livemint.com/cafeeconomics.