Land, labour reforms will end debate on GDP calculation methodology
Reform in land and labour markets will put an end to the debate on India’s new GDP calculation methodology.Updated: Feb 17, 2016, 08:28 IST
The government, in its latest estimates, has forecast that India’s economy will grow at 7.6% in 2015-16, the fastest in five years, buoyed by a strong revival in the industrial sector.
While the government has been upbeat over the latest data which show that India will canter past other big economies in terms of growth rates, lingering doubts remain over the new gross domestic product (GDP) calculation methodology.
During October-December, according to national income data, the manufacturing sector had grown at 12%. This is widely divergent from the data shown by the monthly index of industrial production (IIP), which show that output from thousands of factories across the country has grown at a rather modest 3.9% during April to November.
In the case of investment, however, both IIP and national income data have shown similar trends. According to IIP data, capital goods output, a proxy to gauge investment activity, grew at 4.7% in April to November. The national income data also has pointed towards a deceleration in investment. After adjusting for inflation Gross Fixed Capital Formation (GFCF), a marker for new capacity additions by firms, is set to fall to 29.4% of GDP in 2015-16 from 30.8% in the previous year. This would be the first time in five years when GFCF in constant prices has fallen below 30% of GDP, signs that low consumer demand and high capital cost may have forced firms to defer new capacity additions.
That said, while the jury is still out on the GDP calculation methodology, it is now beyond any reasonable doubt that India remains a bright spot in the world. Having cemented its place as the primary global growth engine, it is in India’s interest to turn the focus of policy on reforming the complex factor markets. Over the last 18 months the world has been peering curiously at what is bubbling in India’s policy laboratory, primarily seeking signs on how the Narendra Modi-led government plans to hasten reforms in the land and labour markets. These reforms are essential to move the growth trend line much above a certain threshold that will effectively end the debate on how fast India is actually growing.