India's macro economic data have been revised in ways that might alter policy perspectives. First, the base year has been changed from 2004-05 to 2011-12. Second, the method of calculating the gross domestic product (GDP) has changed from expenditure-based to value-added. The impact is enormous.
GDP can be calculated via expenditure by adding government expenditure, private sector investment, household consumption and net exports. The other method of calculating GDP involves summing the value of "final" goods and services. This is tricky since there is always a fear of "double-counting" intermediate goods and services.
For example, consider the transportation of fibre-reinforced plastic (FRP) sheets from a factory to a point of sale. This is one of many costs for the FRP manufacturer. The transport could be outsourced to a logistics firm, which in turn, outsources packing and transport.
As far as the FRP manufacturer is concerned, the fee to the logistics firm is the "final charge" for transport. The "value added" for the logistics firm is the profit - the fee it receives, less the fees it pays and its other costs. The manufacturer adds in the cost of transportation when it sells the FRP. In practice, sale is a multi-stage process, with distribution costs and commissions payable. FRP is an intermediate good used in construction. The buyer builds a house, commissioned by a real estate outfit, which sells it to some owner for a "final" cost. The purchase is financed by a mortgage. The "final cost to owner" is more than the price paid to the realtor. The difference between total mortgage payments and the price of the house is the "value added" by the financier, less the latter's other costs.
As this simplified example illustrates, calculating what is intermediate, "final" and "value added" is not easy. There is a constant recalculation at each stage. But if this is done well, it is a more accurate method, especially where services value is concerned. That makes it a better way to calculate GDP in a services-dominated economy like India.
This second value-added method is used commonly in most advanced economies. It ties in with the concept of value-added taxes. In VAT, taxes are levied on intermediate producers, only on the basis of the value added by each intermediate. VAT payers also receive credit.
It makes sense to calculate GDP (gross domestic product) this way, since India uses VAT and the proposed goods & services tax (GST) will take VAT implementation further. The new calculation includes pertinent data from a wide range of corporate businesses. In the long term, the change in method will look sensible.
However, the combination of a change in base year and change in method has meant all GDP growth figures have changed drastically. In the old method, GDP growth was at 4.7 per cent in 2013-14. The new method says GDP grew at 6.9 per cent in 2013-14. The previous financial year, 2012-13, saw growth at 4.5 per cent (old method) versus 5.1 per cent (new). The quarterly estimates, Q by Q for the first three quarters of 2014-15 and also for the full financial year, are due to be released on Monday.
One big problem is apparent divergence. Consider 2013-14 over 2012-13. The old calculation claimed GDP growth in 2013-14 (4.7 per cent) was barely 0.2 per cent better than in 2012-13 (4.5 per cent). The new figures say growth rebounded to 6.9 per cent in 2013-14. That's a huge difference of 2.2 per cent of GDP. It is also a massive 1.8 per cent change over growth in 2012-13 (5.1 per cent in the new).
This rebound wasn't confirmed by other data. Bank credit remained slack, corporate earnings growth was low in those two years, vehicle sales remained in a slump, rail goods traffic and port cargo traffic grew minimally, airlines passenger traffic stagnated. The real estate market appears busted. While the stock market has risen, the capital gains have been driven entirely by foreign funding.
Going back to expenditure indicators, private sector investment is low, household consumption is low and net exports are negative since there is a current account deficit and a trade deficit. It may be dangerous to increase government expenditure since the fiscal deficit is also high.
Perhaps the quarterly GDP numbers and more details about the changed methodology of calculation will resolve these paradoxes. If they do, investors will get a clearer picture of which sectors are likely to be see money flowing in. As of now, all estimates appear to be fuzzy.
