The government recently announced that India’s Gross Domestic Product has grown from 7.2% in the December 2015 quarter to 7.9% in the March 2016 quarter. This should be a reason for much celebration, but popular sentiment seems unaffected. This is because the statistical picture being presented doesn’t reflect ground realities.
Let’s look at a few ground truths.
Gross fixed capital formation, which is the net increase in physical assets within a period – or simply put, investment – is actually decreasing. It has been declining steadily since Quarter 2, when it was 32.9% of the GDP, to 29.9% in Q3 and 29.4% in Q4.
The data released recently shows that gross fixed capital formation in Q4 is down by Rs 17,197 crores or has contracted by 1.9% as compared to Q3. Moreover government expenditure, while having increased by Rs 6482 crores, has actually declined in comparison with the fourth quarter of 2015 by about Rs 4400 crores.
So then what is driving growth? During the United Progress Alliance’s rule, we seemed to have had jobless growth. Are we now seeing investment-less growth?
Another worrying reality is the widening discrepancy between sectoral growths and GDP growth.
Industry growth fell from 8.6% in Q3 to 7.9% in Q4, while the services sector slowed from 9.1% in Q3 to 8.7% in Q4. Only agriculture has reversed the trend, from -1% in Q3 to 2.3% in Q4, after having tumbled down from 2% in Q2.
But here too the numbers don’t do much to assuage the situation on the ground.
During the past two years, vast regions of India have been gripped by a severe drought. Production of food grains has remained largely dormant. It fell from 265.57 million tons in 2013-14 to 257.07 million tons in 2014-15. It is expected to further fall to 253.17 million tons in 2015-16.
There are visible signs of widespread distress in rural areas; the most visible manifestation is the rural migration to cities in search of jobs.
Yet, the agriculture data suggests an optimism that flies in the face of the reality. Clearly, the quality of this data seems questionable, particularly since it is one that suits a practice Chinese economists refer to as adding water to the milk, as it is largely dependent on subjective projections and assessments.
Two things stand out in the recently released Q4 data.
Private final consumption expenditure has shown a spurt from Rs 71.93 lakh crores in 2014-15 to Rs 80.76 lakh crores in 2015-16. A good part of this increase must be attributed to the huge jump in government wages and pensions (including the One Rank One Pension scheme) by more than Rs 1,10,000 crores over the last year alone. No wonder sales of bellwether industries like private and commercial vehicles and household appliances have shown an uptick.
Then, there is another worrying indicator. Credit growth has declined from 9.1% to 8.4% in the last year, due to a slump in industrial credit demand. This suggests that while some sectors are clearly back on the growth track, the growth is being driven by sections of the population whose incomes have risen sharply in recent times. Do we need to thank the Seventh Pay Commission and One Rank One Pension for this?
There is something else that raises concerns. This is the sharp increase in a budgetary item called discrepancies These were Rs 1,43,000 crores in Q4 of 2016, compared with Rs 29,933 crores in Q4 2015.
This is an increase of more than Rs 1,13,000 crores. This is just slightly less than the Q4 growth of Rs 1,27,000 crores in private final consumption expenditure.
In other words, discrepancies contributed to about 50% of GDP growth.
This is similar to the miscellaneous item in business accounting. Every year, account books make a provision under this head, but when the rise in the miscellaneous section is many times more than usual, auditors have to take notice.
If the discrepancies were not taken under consideration for calculating the GDP, for the entire year, this would shave off almost 1% – making the expected annual GDP growth 6.9% instead of the 7.9% that Finance Minister Arun Jaitley has been proudly proclaiming.
The fudge factor
Now that the numbers have been done away with, some explanations are in order.
GDP measures the country’s output as the sum of final expenditures – including consumer spending, private investment, net exports as well as government consumption and investment. Gross domestic income measures the output in terms of the sum of the costs incurred and the incomes earned in the production of GDP.
In theory, GDP should equal GDI; in reality, they are different because their components are estimated using mostly different and less-than-perfect data sources. In national income accounting, the difference between GDP and GDI is called statistical discrepancy; and it is this that balances the GDP and the GDI.
Economists term this item as the official “fudge factor”. Since it’s a contrivance to balance GDP and GDI, wouldn’t the temptation to inflate be is real, particularly when you are desperate to show performance?
Now consider this. Early last year, the government gave itself a little bonus by tweaking the methodology of computing GDP to put economic growth at a higher trajectory by 2.2%.
It’s a pity that the Manmohan Singh government did not do this the year before that, because then the growth for 2013-14, its last year in office, would have been a good-looking 6.9% instead of the dismal 4.7% that Prime Minister Narendra Modi pilloried. But if you remove this 2.2% bonus that came from changing the calculation method and then the discrepancies portion of GDP growth (which accounts for a massive 3.2%) and you’ll find that the GDP growth for the fourth quarter of the previous financial year is just 4.7%
The silver lining
But there are some encouraging signs too. Latest corporate results show that profits are rising.
A study by Financial Express of about 1,200 companies shows that Q4 profits rose by almost 42%, while sales rose only by 4.20%.
A CRISIL study for the 2015-16 financial year, tracking results of 642 companies representing almost 72% of the National Stock Exchange’s market capitalisation, shows that profits rose by 16.7% to Rs 178,833 crores, while revenues rose only 2.5%, to Rs 22,98,030 crores.
Clearly, the prospects for investment are now brighter as Q4 results are heartening. But we must wait a bit for those results to be seen.
With Q4 corporate profits showing a smart upturn and the Indian Meteorological Department categoricallystating that there is “zero chance” of deficient rains this year, we have reason for optimism.
Usually, the met department’s predictions have as much credibility as that of the neighbourhood astrologer, but as we’ve seen from previous trends, after two bad years the probability of a good monsoon becomes very high.
And the truth is that governments may come and go, but it is the monsoons that truly determine economic outcomes.
Economies don’t shift trajectories easily and quickly. India has shown the ability to be on a high trajectory before. A significant portion of the decade-long UPA rule witnessed of unprecedented growth, averaging 7.8%.
But UPA 1 and 2 also sowed the seeds for our present slowdown by spending increasingly on subsidies rather than on capital expenditure. The Modi government needs to urgently reverse this. But it has studiously shirked this task, because ideologically, the Rashtriya Swayamsevak Sangh too shares much of the misguided populism that emphasises on indulging sundry citizens’ appetites rather than on investing in growth and the future.
If merited subsidies had been introduced, mostly for education and health, then that would have left us better placed for faster growth.
The country can witness high growth rates again, but for that, the government must do the right things first.
This includes investing in human capital and productive job creation. Since capital is always a constraint, it must be judiciously used. Fudging data will only create an interim illusion of well-being. Since reality catches up sooner or later, it is better to grapple with it now and rely on the illusion in 2019.