How do you spot an economic revival without poring through reams of statistics put out by the official number crunchers? It’s simple. Look around you: are your neighbours dining out more, or has your friend bought a smarter phone?
Households spending more are early signals of the onset of an economy-wide revival. The clearest indications are available in any market or mall.
These, in turn, get reflected in corporate balance sheets, bank loans, tax collections and other data.
This doesn’t seem to have been the case over the last two years.
So, when in January the Central Statistics Office, using a new method, said that India’s real or “inflation adjusted” GDP in 2013-14 grew 6.9% instead of the earlier estimated 4.7% and by 5.1% in the year before compared to 4.5% in the earlier system, it stumped both experts and the non-initiated.
Volume is not value
Earlier, the index of industrial production (IIP) served as the primary metric for gauging manufacturing and trading activity. The problem was, it only counted the number of units produced and did not distinguish between say the value of a luxury car and an entry-level hatch-back.
It is possible that factory output would have remained stagnant over a period of time, but its value would have multiplied.
“The best example is a car. You can keep selling the same number of cars, but keep improving the quality so the value goes up. An even better example than cars is computers,” TCA Anant, chief statistician of India, told HT.
Earlier, organised industrial activity was based on IIP. It used to get updated two years later based on data coming in from the Annual Survey of Industries (ASI). This has limitations, as ASI only captures goods’ value at the factory gate, and that, too, only of firms registered under the Factories Act.
Now, the corporate affairs ministry’s MCA21 records, a comprehensive compendium of balance sheet data of about 5,00,000 firms, is used. This captures value added by activities even such as marketing, which according to Anant can be significant for large companies such as HUL or L&T.
Critics have questioned the new methodology as it shows that manufacturing has grown at 5.3% in 2013-14 compared to 0.7% earlier.
“Theoretically you can justify this divergence. But it is hard to reconcile with ground-level data,” DK Joshi, chief economist, Crisil, told HT.
According to Anant, the divergence is because the MCA 21 records have brought to light a segment of organised activity, which was earlier, for the most part, invisible. “This is the lower end of the corporate segment. These are companies which are not listed. This category of companies was virtually invisible in our earlier analysis,” Anant said.
Likewise, earlier, all labour used to be equal.
But in the new series, different weights are assigned on whether one was an owner, a hired professional or a helper using a method called “effective labour input.”
The new series also has broken down agriculture to include details as fine as “meat byproducts” with separate values for “heads and legs”, “fat”, “skin”, “edible offals and glands”, of cattle, buffalo, sheep, goat and pig.
How can the economy contract when more data is captured? India’s new method to calculate gross domestic product (GDP) has marginally reduced the economy’s size by Rs 10,000 crore to Rs 113.45 lakh crore in 2013-14 against Rs 113.55 lakh crore in the old data series.
Anant said this anomaly is because of flaws in the earlier data on unorganised trade, which is drawn from the National Sample Survey Organisation’s (NSSO’s) establishment survey. The last such survey was in 2011-12.
“We found that the value added in trade in 2011-12 was lower than what we had been projecting in the old series. Principally that’s what explains the shrink in the size of the economy in 2011-12 and later in the new series compared to the earlier series,” Anant said.
9% or higher ealier?
In the absence of data going back several years, it could be erroneous to fit a trend.
“As the product basket has changed, it will have to be an extrapolation which will be statistical in nature. So we will never really know if the old number of 9%-plus growth were actually that high, higher or lower,” said Madan Sabnavis, chief economist at CARE Ratings.
Anant said the National Accounts Division is trying to create a time series but it is challenging given that MCA 21 data will be available only up to 2007. “This does not mean the new series should not be made, nor that its is wrong,” he said.
How does the new gross domestic product (GDP) data factor in India’s bustling informal economy that operates outside regulatory boundaries?
According to officials, the GDP series captures it well because of the data from surveys of the household economy covering both assets (through the debt and investment survey), expenditure and establishment activity.
“Very few developing countries have this comprehensive group of surveys. Black money is not value addition.
It is how much of this should have been assessed to tax and was therefore not paying tax. That is a much more difficult question to answer,” Anant said.