India's GDP under Prime Minister Narendra Modi grew at 7.3 per cent in fiscal year 2015, overtaking the 6.9 per cent GDP clocked under former PM Manmohan Singh in fiscal year 2014. In the March quarter, India's GDP galloped at 7.5 per cent, outstripping China's 7 per cent growth, according to government data. Friday's GDP data was cheered by the government as proof that the economy is back on tracks. However, according to many economists, the GDP data raises more questions than answers about the health of the Indian economy.
Here are the reasons for the skepticism about GDP data:
1) In the March quarter, GDP grew at 7.5 per cent as compared to 6.6 per cent in December quarter. But economists say the correct gauze to measure growth is gross value addition or GVA and not the headline GDP number. In the March quarter, growth in GVA decelerated to 6.1 per cent as compared to 6.8 per cent in the December quarter.
2) If economy activity slowed down in Q4, what led to the bump up in GDP? According to the new methodology, GDP is calculated by adding GVA and indirect taxes and by subtracting subsidies (GDP=GVA+taxes-subsidies). In March quarter, indirect taxes grew sharply, while subsidy outgo declined, giving a boost to headline GDP.
3) According to ICRA, taxes jumped by 18.9 per cent in the March quarter, while major subsidies came down from Rs 46,300 crore in Q4FY14 to Rs 25,800 crore in Q4FY15. These two components pushed headline GDP higher.
4) ICRA Research's Aditi Nayar pointed that GVA growth declined to 6.5 per cent in the second half (H2) of FY15 from 7.9 per cent in first half (H1) of FY15, led by a broad-based slowdown in industrial expansion as well as contraction in agriculture. This clearly shows that the economy, measured by GVA, is decelerating.
5) The slowdown in GVA from 6.8 per cent in Q3 to 6.1 per cent in Q4 was driven by two factors, says Nomura. First, agriculture output contracted 1.4 per cent year-on-year because of unseasonal rains. Second, the government cut back on spending to meet its fiscal deficit target.
6) Analysts are, however, more worried about the contraction in agricultural growth because it employs a majority of Indians. "Overall GDP grows at 7.3%, but agriculture grows at 0.2%, and it engages 49% of work force. Should one celebrate or cry or do both simultaneously?" asked economist Ashok Gulati on Twitter.
7) The sharp jump in manufacturing growth at 8.4 per cent year-on-year in Q4 was a silver lining. But, Dr. Soumya Kanti Ghosh, chief economic advisor of SBI said the manufacturing growth reflects gains in productivity because of input costs coming down.
8) ICRA also pointed that gross fixed capital formation (as a percentage of GDP at current prices) declined to 28.7 per cent in FY15 from 29.7 per cent in FY14. Gross fixed capital formation is a barometer for investments.
9) Looking forward, economists say there is little reason to believe that FY16 would be a year of spectacular growth. Bank of America Merrill Lynch on Monday cut its FY16 growth forecast to 7.5 per cent and FY17 forecast to 7.9 per cent saying recovery would be back-ended as lending rate cuts take 6 months to support growth.
10) Pranob Sen, chairman, National Statistical Commission, was quoted by BofAML as saying, "...I think there may be some cause to be pessimistic." Explaining his comment, Dr Sen reportedly said that improved efficiency boosted manufacturing growth over the last three years, but with the advantage going away, manufacturing growth could come closer to 5 or 6 per cent in FY16. This will impact overall growth in the current fiscal.
Here are the reasons for the skepticism about GDP data:
1) In the March quarter, GDP grew at 7.5 per cent as compared to 6.6 per cent in December quarter. But economists say the correct gauze to measure growth is gross value addition or GVA and not the headline GDP number. In the March quarter, growth in GVA decelerated to 6.1 per cent as compared to 6.8 per cent in the December quarter.
2) If economy activity slowed down in Q4, what led to the bump up in GDP? According to the new methodology, GDP is calculated by adding GVA and indirect taxes and by subtracting subsidies (GDP=GVA+taxes-subsidies). In March quarter, indirect taxes grew sharply, while subsidy outgo declined, giving a boost to headline GDP.
3) According to ICRA, taxes jumped by 18.9 per cent in the March quarter, while major subsidies came down from Rs 46,300 crore in Q4FY14 to Rs 25,800 crore in Q4FY15. These two components pushed headline GDP higher.
4) ICRA Research's Aditi Nayar pointed that GVA growth declined to 6.5 per cent in the second half (H2) of FY15 from 7.9 per cent in first half (H1) of FY15, led by a broad-based slowdown in industrial expansion as well as contraction in agriculture. This clearly shows that the economy, measured by GVA, is decelerating.
5) The slowdown in GVA from 6.8 per cent in Q3 to 6.1 per cent in Q4 was driven by two factors, says Nomura. First, agriculture output contracted 1.4 per cent year-on-year because of unseasonal rains. Second, the government cut back on spending to meet its fiscal deficit target.
6) Analysts are, however, more worried about the contraction in agricultural growth because it employs a majority of Indians. "Overall GDP grows at 7.3%, but agriculture grows at 0.2%, and it engages 49% of work force. Should one celebrate or cry or do both simultaneously?" asked economist Ashok Gulati on Twitter.
Overall GDP grows at 7.3%, but agri grows at 0.2%, n it engages 49% of work force. Shd one celebrate or cry or do both simultaneously?
— Ashok Gulati (@agulati115) May 30, 20157) The sharp jump in manufacturing growth at 8.4 per cent year-on-year in Q4 was a silver lining. But, Dr. Soumya Kanti Ghosh, chief economic advisor of SBI said the manufacturing growth reflects gains in productivity because of input costs coming down.
8) ICRA also pointed that gross fixed capital formation (as a percentage of GDP at current prices) declined to 28.7 per cent in FY15 from 29.7 per cent in FY14. Gross fixed capital formation is a barometer for investments.
9) Looking forward, economists say there is little reason to believe that FY16 would be a year of spectacular growth. Bank of America Merrill Lynch on Monday cut its FY16 growth forecast to 7.5 per cent and FY17 forecast to 7.9 per cent saying recovery would be back-ended as lending rate cuts take 6 months to support growth.
10) Pranob Sen, chairman, National Statistical Commission, was quoted by BofAML as saying, "...I think there may be some cause to be pessimistic." Explaining his comment, Dr Sen reportedly said that improved efficiency boosted manufacturing growth over the last three years, but with the advantage going away, manufacturing growth could come closer to 5 or 6 per cent in FY16. This will impact overall growth in the current fiscal.
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