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With the Index of Industrial Production (IIP) slowing to a 2.6 per cent rise in January as against 3.2 per cent in December, and with leading economic indicators showing signs of sluggishness, it is getting harder to reconcile the new Gross Domestic Product (GDP) numbers with ground reality.
A report from the Emerging Advisors Group, a global consultant, examines the growing divergence between GDP growth as measured by the new set of metrics and key indicators of economic activity which, it feels, correlate well with GDP growth. Economists often rely on proxies such as electricity production to gauge real growth. The 12 indicators it identifies are agricultural and industrial production, credit growth, electricity and cement generation, vehicle sales and freight traffic growth, export volume, corporate sales, the revenue of listed companies and government revenue.
The report contrasts the real growth of each of these indicators during the high-growth phase of 2005 and 2006, when the economy expanded at a scorching annual nine-plus per cent, with their growth in the second half of last year (July to December), when GDP growth according to the revised methodology was just shy of eight per cent.
Issues
The divergence is staggering. Almost every data point points to a much lower growth figure. Of all the 12 indicators, only one - power generation - grew faster in 2014 than in earlier years. And, the growth for three other indicators - vehicle sales, freight traffic and cement production - in 2014 could be said to be near those in the earlier years. For all other indicators, a large gap exists.
Similar data for 40 other emerging markets indicates while India is ahead on every metric, the margin isn't that large. This suggests that India is growing perhaps a few percentage points higher than the emerging market universe, probably around five per cent annually, nowhere near eight per cent. It is, thus, difficult to brush aside scepticism over the reliability of the latest GDP numbers Responding to this scepticism over the new series, the Central Statistics Office (CSO), which provides GDP estimates, has put out a detailed explanation for the changes under the revised methodology.
Replies & queries
Part of the difference between the earlier and the new series could be attributed to the inclusion of new data sources, which have a wider coverage, it says. However, if one accepts this, using the same sources for previous years could lead to higher GDP growth in the mid-2000s.
The other, probably more critical change to the way the new numbers have been calculated, is the way value added, especially in manufacturing, has been estimated. The sharp turnaround in manufacturing under the new series is because of the use of a new corporate data base, MCA 21, which has had significant implication for value addition and growth.
For large companies, the difference between value addition under the earlier and new series is significant. Enterprises, the CSO argues, provide post-manufacturing value added, through marketing and other services. This component of value added was earlier being excluded from GDP because it was not covered in the Annual Survey of Industries, although the enterprise concerned belonged to the manufacturing segment.
As all the key economic indicators the report focuses on are essentially volume indicators, this increase in value addition will not get reflected in those. Hence the divergence between the indicators is bound to be present.
But, despite clarifications from CSO, doubts linger. International analysts, who until now did not question the authenticity of India's economic data, are now raising questions, comparing it to China. Which, they allege, tinkers with figures to show higher growth. To allay such concerns, analysts are pressing for CSO to release the GDP numbers for the previous years, which will allow them to get a better understanding of the underlying growth dynamics.
