GDP — much ado about nothing

Rather than nit-picking on the back series data, policy makers need to push reforms to ensure a sustainable growth

Remember all the ruckus when the Central Statistics Office (CSO) had put out India’s new GDP series (base year 2011-12) in 2015? The revised growth numbers for GDP then had revealed that the Indian economy was doing just fine, even when, at the ground level, companies were grappling with weak demand and high debt.

The short answer for the divergence in the revised growth numbers and the previous estimates (old GDP) and other indicators of industrial activity, such as the Index of Industrial Production (IIP), offered by the CSO was this — the new series is a value-added index while the others were volume-based indicators. The overall growth figures under the new series were hence higher and optically more pleasing.

If the explanation given then was indeed credible, then why is the Centre fighting furiously to shut out the historical estimates for India’s new GDP series, which has — understandably — bumped up the growth numbers? India’s GDP numbers were back-casted and revealed by the Sudipto Mundle committee report on real sector statistics, recently.

The tentative estimates have pegged the average GDP growth higher under the two UPA regimes than under the NDA tenure. If the UPA camp has been quick to gloat over the presumably healthier growth under its regime, the government in its defence has clarified that the Committee’s estimates are only ‘experimental’.

Old vs new

A more comprehensive data on corporate activity, considering activity at the enterprise-level, and ascertaining gross value-added rather than GDP at factor cost, are key aspects that had set the new GDP apart from the old GDP.

Under the new series, the manufacturing sector had, in particular, showed a better performance due to the change in measuring value-addition. This had led to a sharp bump up in GDP numbers for 2012-13 and 2013-14, when the new methodology was adopted in 2015.

 

 

 

The growth in new GDP back series plotted by the Mundle panel is also consistently higher than the growth in old GDP every year since 2003-04. Hence the average growth rate (GDP at market prices) under the UPA regime (2004-05 to 2008-09 and 2009-10 to 2013-14) is a higher 8 per cent than the 7.5 per cent reading under the old method. With the average growth under NDA government (2014-15 to 2017-18) an average of 7.3 per cent, it has no doubt ruffled a few feathers.

But going by publicly available data on components used in calculating GDP, the back-casted figures may well be given half a chance.

GVA, GDP and the bump up

At the heart of the debate is the growth in GDP rising above the 10 per cent mark in two years under the UPA regime in the back series. In 2007-08 and 2010-11, the new GDP numbers are 40-50 basis points higher than the old GDP.

In 2007-08, the GDP growth under the old series stood at 9.8 per cent. The committee’s back-casted growth in gross value-added for the same year shows a similar growth at 9.79 per cent. But in deriving the GDP back series from the GVA, the growth number moves up to 10.2 per cent. Why?

A key adjustment under the new series is the adjustment for indirect tax and subsidy to the GVA — the idea is to arrive at the price paid by the consumer. Hence, indirect taxes are added while subsidies are subtracted from GVA to arrive at GDP under the new series.

In 2007-08, there is a healthy growth in indirect taxes (RBI data on indirect taxes of the Centre and State governments) at 15-odd per cent. In 2010-11 — the other arguable year of high growth under the GDP back series — while the GVA growth was 9.4 per cent, the growth in GDP is estimated at an envious 10.8 per cent. Again, the sharp difference can, to an extent, be explained by the sharp 32 per cent growth in indirect taxes.

A look at the data from 1994-95 suggests that the trend in the divergence between GVA and GDP, more or less tracks the movement in indirect taxes and subsidies (only pertaining to the Centre). In 2008-09, when the GVA back series grew by 7.2 per cent, GDP was a much lower 4.15 per cent. A sharp 82.8 per cent jump in subsidies that year, has led to the much lower growth in GDP vis-à-vis GVA.

Sorely needed

Hence, numerically, the growth projected in the back-casted series appears conceivable. Of course, the extent of divergence between the old and the new can vary, depending on the final method that is adopted for conversion of the old series to new. But it is doubtful that the trend will be any different under the alternative methods.

Remember, the first leg of UPA regime coincided with the unbridled growth across global markets. The stimulus-led growth in 2010-11 is also well known. While the NDA started off on a healthy note, demonetisation and GST have hurt growth in the interim. Considering all this, while the back-series data may need more fine-tuning (the production shift method used by Mundle panel, wherein the difference in output in 2011-12, is redistributed backwards up to 1993-94, may not be fail-safe) it would be unwise to rubbish it in a hurry. After all, what matters is the broad growth trend in the long term, which, under the back-casted series, appears much in sync with the old data.

Macro imbalances

Remember three years after the new methodology for calculating GDP was introduced, there are still questions over its credibility. Economists have time and again debated over India’s growth numbers that are often at odds with other important indicators of industrial activity, such as the IIP. Hence, rather than going back and forth on GDP data, policy-makers should quickly address the urgent need for a credible back-series data. It is only then that one can track India’s long-term growth path and take necessary policy actions to ensure a sustainable growth. The much-debated 10 per cent growth number under the UPA regime was marked by high inflation and fiscal deficits — hardly sustainable and desirable.

After faltering for two years, the growth in the economy is expected to rebound this fiscal, thanks to a favourable base and early signs of improving economic activity. But what is concerning is the macroeconomic imbalances that are back in focus — rising inflation, fiscal slippages, falling rupee and tightening of global liquidity. Rather than nit-pick on singular data points, the government needs to push forward structural reforms to ensure a sustainable growth.

As far as the data debate goes, there is a more urgent need to plug data gaps as elucidated by the Mundle report. For instance, the only source of data available for compiling estimates of unorganised segment of manufacturing is the NSS Enterprise Surveys, and these are conducted only once in every five years. The report also talks of serious data gaps in compilation of national accounts for the organised sector. These are issues that call for immediate attention, if workings on India’s GDP numbers are to be credible.

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