How fast is India really growing? All you need to know
Reserve Bank of India (RBI) Raghuram Rajan on Thursday obliquely raised fresh questions over India’s new method to calculate national income.business Updated: Jan 30, 2016 10:57 IST
India’s economy grew at 7.2% in 2014-15, according revised estimates released on Friday using a new formula that covers a raft of activities from farm-level livestock to mega infrastructure projects.
In January last year the Central Statistics Office (CSO), released a new method that showed that India’s real or “inflation adjusted” GDP in 2013-14 grew 6.9% instead of the earlier estimates of 4.7%. Data released in May showed, using the same method showed that India’s GDP grew at 7.3% in 2014-15.
Both these estimates have now been revised to 6.3% and 7.2% respectively.
Reserve Bank of India (RBI) Raghuram Rajan on Thursday obliquely raised fresh questions over India’s new method to calculate national income.
The new methodology has stumped both experts and the uninitiated.
Data from other sources such as household spending, corporate earnings and tax collections and sales of goods and services are weak and do not mirror the revival trends seen in the GDP numbers.
Here’s all you wanted to know about the debate:
(This is an updated version of the explainer that was published in hindustantimes.com on May 29, 2015)
What is GDP?
Gross Domestic Product or GDP represents the total value of all the final goods and services that are produced within a country’s borders within a particular time period, typically a year.
What is real and nominal GDP?
It is important to distinguish between nominal GDP and real GDP. Nominal GDP is calculated at current prices and does not factor in inflation.
Real GDP is GDP adjusted for inflation.
What is a “base year”?
The base year of the national accounts is the year chosen to enable inter-year comparisons. It is changed periodically to factor in structural changes in the economy and present a more realistic picture of macroeconomic aggregates The new series changes the base to 2011-12 from 2004-05.
What is the difference between the earlier and new formula for calculating GDP?
Earlier, the index of industrial production (IIP) or factory output served as the primary metric to gauge 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.
So, what’s the difference now?
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 can be significant for large companies such as HUL or L&T.
Is the difference very high?
Many have pointed out anomalies such as manufacturing showing estimated growth of 7.1% for 2014-15, which under the index of industrial production (IIP) data for factory output was 2.3%. According to critics, theoretically you can justify this divergence. But it is hard to reconcile with ground level data and weak corporate earnings.
According to CSO officials, the divergence is because of the MCA 21 records have brought to light a segment of organised activity, which was earlier, for the most part, invisible.
What about calculation of labour income?
Likewise, earlier all labour used to be equal. Not in the new series where different weights are assigned on whether one was an owner, a hired professional or a helper using a method called “effective labour input.”
Value addition in agriculture is now taken beyond farm produce. Livestock data is critical to new method. Value attached to byproducts of meat including “heads and legs”, “fat” “skin”, “edible offal and glands” of cattle, buffalo, sheep, goat and pig.
What about calculating value of trading related services?
The new series uses NSSO’s 2011-12 establishment survey, compared to the 1999 survey data used in the earlier series. The latest survey showed that value addition in trade was significantly lower than what was being projected in the old series, which used extrapolated data from a survey conducted in 1999.
Does the new data robustly capture income generated by the financial sector?
Financial corporations in the private sector, other than banking and insurance, in the earlier series was limited to a few mutual funds (primarily UTI) and estimates for the Non-Government Non-Banking Finance Companies as compiled by RBI.
In the new series, the coverage of financial sector has been expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.
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. According to the official number crunchers at CSO this anomaly is because of flaws in the earlier data on unorganised trade, which is drawn from the NSSO’s establishment survey. The last such survey was in 2011-12. It was found that the value added in trade in 2011-12 was significantly lower than what CSO had been projecting in the old series.
So, did India grow at 9%-plus or higher earlier?
In the absence of data going back several years, it could be erroneous to fit a trend. As the product basket has changed we can never get the actual production and price numbers. 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.
How does the new 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. This comprehensive group of surveys very few developing countries have. 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.
What about the growth trends in 2015-16?
According to the government’s Mid-Year Economic Analysis tabled in Parliament last month, India will likely grow at 7-7.5% in 2015-16, slower than 8.1-8.5% estimated in February, hit by two years of back-to-back droughts, plunging exports and weak private sector investment.
What has the mid-year analysis said about the new methodology?
The mid-year analysis, an official economic report card of sorts, however hinted at problems with the new methodology to calculate India’s national income, but maintained the new estimates were not “motivated” primarily to show an expanded economy.
“The data uncertainty is in fact reflected in the mixed, sometimes puzzling, signals emanating from the economy,” the analysis said.
“The suggestion or insinuation of motivated GDP estimates is preposterous,” it said. “That said, GDP estimates may be prone to measurement uncertainty as they are in all countries.”
While factory output measured by the index of industrial production (IIP) has grown marginally faster in the first six months this year than the last, there is considerable variation across sectors.
Power, fertilisers, and car production have been surging, in contrast, commodities such as steel, iron, aluminium, and cement are doing less well. Growth in capital goods imports, a proxy for investment activity, has decelerated sharply from about 12% in April 2015 to barely positive territory.
What are the other areas of concern?
India’s nominal or actual GDP is estimated to grow at 8.2% in 2015-16, significantly lower than the previous years’ 13-15% growth, which can be an indicator of worrying symptoms of weak investment and consumer spending.
Nominal GDP growth has been declining sharply, and the demand outlook going forward is mixed, which runs the risk of intensifying corporate debt burdens and impeding, the investment revival that is so urgently needed.
A sharp decline in nominal GDP could also mean that if inflation starts rising, “real” or “inflation-adjusted” GDP growth rate can fall sharply from the current 7-7.5% levels.
According to the mid-year analysis the sharp and continuing decline in nominal GDP growth, as well as the fact that the economy is powered only by private consumption and public investment—is a cause for concern.
Exports, which have plunged for the past 13 successive months in December, remain a key concern.
Declining exports seem to be predominantly determined by a decline in the world demand. Regardless of the causes, the effect has been a drag on growth.