According to the Central Statistical Organisation’s (CSO’s) revised series, gross capital formation declined by 1.7 per cent in real terms in 2008-09. The revised series uses 2004-05 as the base year in place of the base year of 1999-2000 which was used earlier. The decline in capital formation is a reversal of what the earlier series indicated — a growth of 8.3 per cent in capital formation in the same year.
The figure of 1.7 per cent is reached before the CSO adjusts the capital formation numbers for errors and omissions. After such an adjustment (which itself is about 2 per cent of the capital formation), the fall is much steeper at 4 per cent in real terms.
It is doubtful that such a large revision has been caused entirely by a change in the base year. The CSO should clarify what has caused this big change in its estimate of growth in capital formation within a period of less than 10 months — from a reasonably robust growth of 8.3 per cent to a fall of 1.7 per cent.
The magnitude of the current revision raises doubts about the data sources or the methodology adopted by the CSO. It is best that the CSO explains the differences in some detail to build confidence or it suitably modifies its data sources or methodologies to improve the estimates. It is imperative that CSO’s methods and estimates are credible so that they can be relied upon, particularly in times of a crisis such as the one in 2008-09.
Prima facie, it appears that the CSO got its change in inventory numbers wrong in its first estimates published in May 2009 (these used 1999-2000 as the base year but this change in base year is unlikely to be relevant to the level of revision). It had then estimated that change in stocks would be nearly 3 per cent higher as of March 2009 compared to that of March 2008. Now, it estimates that the change in stock was, in fact, 61 per cent lower.
The CSO’s revised estimates could well be more accurate than their earlier estimates. But the question is why the CSO got it so way off the mark in its first estimate. The quarterly financial statements of listed companies had clearly indicated a winding down of inventories in the December 2008 and March 2009 quarters. There was a year-on-year increase in the prices, so the real fall in the change in inventory during the year was even sharper than seen in the financials of companies. So, the CSO could have seen the fall in the build-up of inventories then. Why could it not?
But change in stock plays a small role in the overall capital formation estimates. More than 80 per cent of the capital formation estimates are in fixed capital formation (this is in construction and installation of plant and machinery). In this case, the CSO has cut its estimates of growth by half — from 8.2 per cent earlier to 4 per cent now. This is a significant cut and it merits an explanation from the CSO.
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Gross fixed capital formation grew between 14.3 and 15.3 per cent per annum between 2005-06 and 2007-08 (as per the new series). These growth rates are only slightly different from the 13-17.6 per cent band in which they ranged in the old series. Compared to these growth rates, the fall to 4 per cent in 2008-09 is quite significant. But, this significant fall in the growth in fixed capital formation is at odds with the inferences we can draw from the other independent data sources.
For example, audited financial statements of manufacturing companies do not indicate such a fall in investments. The aggregate gross fixed assets (GFAs) of large- and medium- sized companies grew by 20.2 per cent in nominal terms in 2008-09 (according to the CMIE’s Prowess database). This was the best growth in the GFA in nominal terms in the past decade. But, since inflation was high during the year, the inflation-adjusted growth dropped sharply — to 11.2 per cent. This growth is much higher than that indicated in the revised series of the CSO.
While differences in growth rates are understandable (after all, fixed capital formation and growth in gross fixed assets of companies are related but different measures), the difference in direction is difficult to appreciate. While the CSO’s estimates indicate a serious slowdown, the CMIE’s Prowess database shows no slowdown in the growth rate compared to the preceding years. Gross fixed assets of these companies have grown consistently between 11 and 13 per cent per annum in real terms since 2005-06. The 11.2 per cent growth in 2008-09 indicates no fall in the momentum.
In fact, the 11.2 per cent growth seen in 2008-09 in GFAs of manufacturing companies in the Prowess database is best juxtaposed against the CSO’s estimates of growth in fixed capital formation in the private corporate sector, which, it believes, fell by 5.1 per cent. Now, here is a sharp difference in magnitude and direction. How do we reconcile such large differences between official estimates and inferences drawn from alternative publicly available data?
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| GROWTH IN CAPITAL FORMATION AT CONSTANT 2004-05 PRICES (% change) | ||||
| 2005-06 | 2006-07 | 2007-08 | 2008-09 | |
| Gross capital formation | 15.30 | 16.1 | 14.8 | -1.7 |
| Gross fixed capital formation | 15.3 | 14.3 | 15.2 | 4.0 |
| Public sector | 14.7 | 20.0 | 11.1 | 10.0 |
| Private sector | 41.7 | 18.7 | 20.6 | -5.1 |
| Construction | 70.8 | 13.1 | -4.7 | 6.2 |
| Machinery and equipment | 31.8 | 21.1 | 31.0 | -8.5 |
| Household sector | -3.4 | 6.1 | 31.0 | 11.2 |
| Change in stock | 24.8 | 35.0 | 15.1 | -61.2 |
| Valuables | -2.2 | 15.0 | 15.1 | 23.6 |
| Gross capital formation adjusted for errors & omissions | 14.7 | 14.5 | 16.9 | -4.0 |
| Source: Quick Estimates of Central Statistical Organisation | ||||
Within the private corporate sector, according to the CSO, fixed capital formation in construction did grow (by 6.2 per cent), but it fell sharply (by 8.5 per cent) in machinery and equipment. What this means is that the growth in capital formation fell in 2008-09 essentially because inventories were wound down and because the private corporate sector did not add more plant and machineries compared to the previous year. What was the private corporate sector constructing that it was not filling them with machinery? How can one explain such a divergent trend? Possibly, the data on cement consumption is a lot more reliable than the data on production of machines.
The CSO’s advance estimates indicate that it expects gross fixed capital formation to grow by 5.2 per cent in 2009-10. This is modest given that the earlier year (according to the CSO) had also seen a modest growth of only 4 per cent. The CMIE’s CapEx database shows that investments have grown well in 2009-10 and are likely to continue to show a robust growth in 2010-11.
The author is managing director and CEO, Centre for Monitoring Indian Economy