According to the Gross Domestic Product (GDP) data that the Central Statistics Office (CSO) released recently, India’s economy expanded at a slower-than-expected pace of 7.1% in the fiscal second quarter despite a lower base. This has prompted analysts to revise their growth estimates for the full year. And coming just ahead of the Lok Sabha elections this has become a hot potato.
The September quarter gross domestic product (GDP) growth rate, according to economists, is sharply slower than their 7.5% estimate in a survey they had done.
The slowdown in growth momentum, along with retail inflation, may prompt, according to these analysts, the Reserve Bank of India to keep interest rates unchanged in its bi-monthly monetary policy review that is due on December 5.
The GDP data that the CSO released spurred a political slanging match with the assertion that the first quarter growth of 8.2%, a nine-quarter high, was an aberration and was unlikely to be repeated soon enough.
The Economic Affairs Secretary, Mr. Subhash Chandra Garg, though, admitted that the GDP data has been disappointing. He pointed out that the ‘manufacturing growth at 7.4% and agriculture growth at 3.8% are steady. Construction at 6.8% and mining at -2.4% reflect monsoon months’ deceleration and half-year growth at 7.4% is still quite robust and healthy.’
According to him industrial value addition slowed to 6.8% in the fiscal second quarter from 10.3% in the preceding June quarter, while services saw growth picking up marginally to 7.5% from 7.3% in the first quarter. Private consumption, after picking up in the fiscal first quarter, slowed to 7% in the second, while investment demand accelerated to 12.5% in the second quarter, indicating a revival in investment activity.
He is optimistic that the second half (October-March) of 2018-19 is also likely to see moderation of GDP growth on the back of lagged impact of higher interest rates, high oil prices, a weak rupee and a liquidity squeeze the non-banks face.
All kinds of interpretations and conspiracy theories are floating, especially with the spectre of elections looming. The release of the GDP back-series for the period FY05 to FY12 by the CSO itself has come in for attack as also the fact that NITI Aayog was directly involved in the presentation of the statistical data. There is also the question whether the back-series makes economic sense, and whether it can be ‘interpreted’ as an accurate reflection of reality.
The new series of GDP data (base 2011-12) has been vetted by statistical experts of the international agencies involved in a worldwide exercise, e.g., the UN, IMF and the World Bank. And the unprecedented discussion about the ‘accuracy’ of this new GDP data (now in its fourth year) is entirely political and would not have happened, according to experts, if the UPA had not suffered a shock electoral defeat in 2014.
Significantly the new GDP series was presented in end of January 2015 barely seven months after that Congress defeat and the debate that has followed has been unique to India, and even the world. Such GDP changes to a new series are routine, and has occurred at least six times even in India and never before led to any discussion or contentious debate. Base year changes have occurred in 1960-61, 1970-71, 1980-81, 1993-94, 1999-00, 2004-05, and now 2011-12 and there has never been any discussion, let alone heated debate. The question remains, why did this happen in India, and that too post 2014?
To get to some hard facts and technical details that indicate strongly that the lowering of GDP growth for FY05 to FY12 was entirely as expected, primarily because of the surprise low employment growth between FY05 and FY12.
The story behind the new GDP series, has its explanation regarding NSSO employment data for the past 20-odd years. There is one major sector, wholesale and retail trade (WRT), whose GDP estimation is directly dependent on employment data as revealed by NSSO. In the old 2004-05 series, this sector accounted for 16% of GDP and in the new 2011-12 series, it accounts for only 11%. This large decline can be explained by examining the traditional method of estimating WRT GDP.
On the release of the NSSO employment data, that is done approximately every five years, the CSO looked at employment gains of this sector and assuming some productivity growth of the labour arrived at an estimate of sectors GDP. In 1999-2000, there were 34.4 million people working in WRT, and this increased to 41.7 million in FY05, an annual growth rate of 3.9% per annum. The total employment in the economy increased at a CAGR of 2.4% per annum (from 371 million in 1999-2000 to 419 million in FY12) and the GDP growth was 5.5% per annum, implying an average productivity growth of 2.1% per annum.
This healthy growth in employment was assumed by the CSO in making estimates until the next major NSSO survey, in FY12, became available. There was a drought-infected NSSO survey for FY10 which was rightfully ignored by the CSO. The results of the FY12 NSSO survey were a shocker for employment gains, and the jobless growth during these years is not much discussed. For the period FY05 to FY12, NSSO data revealed a total job gain of only 9 million (from 419 million to 428 million). Nine million over seven years is a CAGR of only 0.3% per annum. The GDP growth for this period: 8.1% per annum implying an average productivity growth of 7.8% per annum.
Some acceleration in labour productivity growth was to be expected given the huge investment—but it was just 7.8% per annum. It is obvious that there has been some overstatement in the GDP series for the (UPA) period, FY05 to FY12. For WRT, the growth in employment was even lower than the aggregate, just 0.2% per annum. The CSO, and its international advisers, rightly got down to the task of changing the method of estimating GDP. They rightly converged on using growth in real sales tax revenue as an indicator in wholesale and retail trade.
The new CSO back series projects GDP growth to be 6.6% per annum between FY05 and FY12, versus the 8.1% contained in the old GDP series—i.e., about 150 bps per year lower average growth.
Inflation between FY05 and FY12 has also been corrected in the new back series. The deflator is a weighted combination of the WPI and CPI inflation indices. The two increased at a CAGR rate of 6.4% and 7.9%, respectively, between FY05 and FY12; however, the old GDP deflator has an average inflation rate of only 6.7%. A mid-point of the CPI and WPI inflation yields 7.2%.
These two simple computations suggest that any back series for the earlier than 2011-12 should lower GDP growth, not raise it. Incorporating employment growth estimate for just 10% of the labour force, and an under-estimation of inflation, the GDP back series lowers GDP growth in the 2005-2012 period.The CSO estimate, incorporating all factors, is for a decline of 150 bps per year, a very credible estimate. But with the spectre of elections looming politicians and even some economic experts may not like it.