GDP: More puzzles, more confusion

If the National Accounts Statistics with 2011–12 as the new base year, which were released by the Central Statistics Office (CSO) in end January, raised as many questions as provided answers on the measurement of the size of the Indian economy, the advance estimates of national income in 2014–15 put out 10 days later cast a fresh set of doubts on the accuracy of the gross domestic product (GDP) numbers for the current fiscal. The CSO, based on new estimates of growth in the first three quarters, and on projections for the third quarter, says that 2014–15 will end with India showing a growth in real terms of as much as 7.4%. This will follow on the 6.9% growth in 2013–14 according to the CSO’s revised numbers, which too seemed out of touch with reality. The reason why the CSO’s advance estimates for 2014–15 have been viewed with even greater scepticism is that on the ground there are no visible signs of growth acceleration, let alone of a boom as these growth rates should imply.

Important macroeconomic indicators run counter to the CSO’s numbers for the current fiscal year. The index of industrial production (IIP) grew by only 2.1% in April–December 2014, yet GDP in manufacturing is projected to grow by as much as 6.7% in the entire year. Exports in dollar terms have grown by a meagre 2.4% during April 2014–January 2015 as against 6.4% during the corresponding period of 2013–14. The performance of corporates, as measured by net sales and profits, has also been disappointing so far.

There are other sectoral growth numbers which are very puzzling. Finance, real estate and professional services (with a share of 21% in total gross value added or GVA at factor cost) are projected to grow by 14% in 2014–15, building on 8% growth in 2013–14. But bank credit by the scheduled commercial banks (one important indicator of activity in the financial sector) has been increasing at a slow pace and has slowed down since last year.

The CSO’s estimates also say public administration, defence and other services (share of 13% in GVA) will have expanded by 8.8% in 2014–15, an acceleration over an 8% growth in 2013–14. Yet, growth in public expenditures has been niggardly during 2014–15; total central government expenditure rose by only 6.2% in April–December 2014. The only major sector where there is some correspondence between the CSO’s advance estimates and ground realities is agriculture: growth in real terms is to plunge from 3.8% in 2013–14 to just 1.1% in 2014–15.

All these numbers show that neither the macro indicators nor the sources of growth justify the buoyancy in the CSO’s advance estimates of GDP growth in 2014–15. Senior officials of the CSO and the National Statistical Commission have correctly pointed out that GDP measures value added and not volumes, and that therefore higher GDP growth may reflect improvements in efficiency rather than an expansion of output. True, but if the GDP growth of 6.9% in 2013–14 was, as has been suggested, a result of greater efficiency in the economy, then does the even faster growth of 7.5% in 2014–15 represent a further quantum improvement in efficiency? This is highly unlikely. The absence of any visible signs of either productivity improvements or volume increases in any major sector therefore makes these new GDP numbers a very puzzling set of statistics.

GDP growth in current prices will, according to the CSO, actually slow this year: 11.5% in 2014–15 vs 13.6% in 2013–14. Simultaneously, inflation has declined in the current fiscal, in a few sectors prices have even fallen. The decline in inflation — as measured by the GDP deflator — converted this modest deceleration in the growth of GDP at current prices into an acceleration in GDP growth at constant prices. In the end, the reason for the perplexing estimate of faster real GDP growth in 2014–15 may therefore be purely statistical.