Through the economic data fog

There are broadly two views on the Indian economy. One is untrammelled boosterism, the dream of becoming a $5 trillion economy, delivered by an ostensible era of perpetual prosperity, supported by a set of rosy data. Another view is sceptical of such an inference based on a different data set. There are enough data points to support both sides, which makes for, what I call, an economic data fog, leaving us confused about where the economy is truly headed. Consider the growth of gross domestic product (GDP). GDP growth is seen to be the biggest and the most important piece of data that points to the overall trajectory of the economy. For the first three months of this year, nominal growth in GDP was just 8 per cent while real GDP growth was 7.8 per cent, implying that the inflation rate was just 0.2 per cent. As anyone knows, this does not pass the smell test because inflation is not that low. But the government has a ready explanation. Real GDP (adjusted for inflation) is arrived at by applying the GDP deflator to nominal GDP. India’s deflator is dominated by the wholesale price index (WPI). And the WPI has indeed fallen sharply, leading to a very low GDP deflator of 0.2 per cent, boosting real GDP. This has immediately invited criticism, both on how India calculates its GDP growth and also on the validity of using the WPI as the GDP deflator.

GDP growth: India uses the income or production approach to calculate GDP as distinct from the expenditure method (used in the US) and a blended method (in Germany, the UK, and Australia), states Ashoka Mody, visiting professor of international economic policy at Princeton University, writing in a Project Syndicate column. “In principle, expenditure should equal income earned, because producers can earn incomes only when others buy their output,” he writes, but “while income from production increased at an annual 7.8 per cent rate in April-June, expenditure rose by only 1.4%.” This difference is too wide and needs to be accounted for. The government claims since it has been consistent with its approach (in using income data) there is nothing to question here. Dr Mody argues that if we apply the US Bureau of Economic Affairs method to the Indian data, the recent growth rate falls from the headline 7.8 per cent to 4.5 per cent.

Inflation: What about the inflation or GDP deflator? Arvind Subramanian and Josh Felman, writing for this paper, are also sceptical of the 7.8 per cent GDP growth figure, but for a different reason. They cast doubt on the 0.2 per cent GDP deflator. We cannot assume that inflation is being measured properly, they argue. “GDP deflator is not hard data. It is not measured directly, like the consumer price index (CPI); it is instead a derived number, calculated through a methodology that has well-known problems.” The authors list several flaws with how the GDP deflator is calculated and argue that while the GDP deflator will never be the same as the CPI, “in the other major economies the difference between the two measures has been small”. If GDP inflation is based on something close to the CPI, then India recorded much higher growth in earlier quarters but only around 3 per cent growth in the last quarter (assuming the CPI to be 5 per cent). Maybe the economy is doing better than what the numbers capture. Maybe worse. We just don’t know. The quality of the data is not good enough. The Ministry of Finance itself admits to problems of using some of the traditionally gathered data. A few days ago it posted on X.com: “If anything, India’s growth numbers might understate the reality because manufacturing growth indicated by the Index of Industrial Production is far lower than what manufacturing companies are reporting.”

Other data: To get a better picture of India’s growth, one will have to look at an array of data, some of which are more reliable, such as direct tax revenues, e-way bills, goods and services tax (GST) collection, rail traffic, and external trade. On September 22, the government released its monthly economic review. The data for the first five months of the year does not present a picture of great buoyancy. On the positive side, GST collection increased by 11 per cent, the e-way bill volume was up 16.7 per cent, cement and steel production was strong, and bank credit expanded by 19.7 per cent. But gross tax revenues increased by only 2.8 per cent (April-July), the index of industrial production was up just 4.8 per cent (April-July), power consumption was up 5 per cent, rail traffic was up only 2.2 per cent and, most importantly, overall exports were down 5.21 per cent and imports declined 10.35 per cent. Merchandise exports, reflecting India’s poor competitiveness (which remains unaddressed), were down 11.8 per cent.

The picture of the Indian economy is one of near stagnation between 2011 and 2020, a massive bounce-back in the immediate post-pandemic period, and now muted growth. What has sustained India’s economic growth in the last few quarters is the humungous government capital expenditure (capex) simultaneously deployed in multiple directions: Defence, railways, urban transport, logistics, and other infrastructure projects. This strategy of creating growth through government capex is not sustainable in isolation. It depends on continued high tax collection, which in turn depends on high economic growth. And high growth is not a given, based on the current data. Note that in the first five months of this year, the fiscal deficit and revenue deficit have shot up due to low tax revenues.

The writer is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers