The contradictions in macroeconomic data are hard to reconcile. A changed methodology of gross domestic product (GDP) calculation does, perhaps, account for some of the sharp rise in growth. But, much of the data doesn't indicate growth acceleration. Also, methodology does not account for many odd discrepancies.
Calculating GDP the new way involves, first, the calculation of gross valued added (GVA). Then, the value of taxes is added to GVA and subsidies are subtracted, to arrive at nominal GDP. Finally, a deflator is used to offset inflation, to calculate real GDP.
There are possible pitfalls in calculation at every stage. India moved to this method of calculation recently and the tax system is not fully aligned to value-added taxation. So, mistakes are possible. The high value of discrepancies between GDP calculated from production versus GDP calculated from expenditure suggests possible problems.
It is also possible under the GVA method for physical output to remain constant in volume, or even shrink, while GVA and GDP rise. This can happen if value addition per item rises, or compensation per service rises, even if volume does not change.
The first situation - higher VA for physical items - has not occurred, if we go by the fact that profits have grown very moderately in the past two financial years. The second situation might have occurred. Employee costs for all sorts of businesses have increased appreciably, implying the cost of services has risen.
The next stage of calculation would have clearly led to higher GDP, even if VA had not changed much. Taxes have risen and subsidies fallen because crude oil and gas prices have stayed down. Both items must, therefore, have added to GDP.
The issue of the deflator is tricky. But, there is a chance the deflator method is flawed and has led to GDP over-estimation. In fact, the Reserve Bank of India (RBI) said there was an issue with the deflator.
Sometime ago wholesale Price Index (WPI)-based inflation fell through the last financial year - it fell through the last six quarters. A deflator constructed around the WPI, would have overstated GDP. Such a deflator might be illogical, as the WPI has no services component and over half of economic activity is service-oriented. But, it is possible the deflator is WPI-based.
These discrepancies would have been ignored if it had not been for other indicators looking weaker than expected with 7.5 per cent GDP growth. First and foremost, bank credit is in the doldrums and at the lowest levels in at least a decade. This doesn't indicate high investment or strong consumption. Exports have shrunk now for over six quarters. Centre for Monitoring Indian Economy (CMIE) estimates that Rs 85,000 crore was stuck in stalled projects as of March 2016.
There are a few positive signals . The latest corporate results indicate revenues and profits have, at long last, moved up a little. Railway freight traffic has not seen much growth but there has been improved port activity (mainly due to bans on iron ore being lifted). Air passenger traffic is up. Vehicle sales did reasonably in the past financial year. Electricity generation is up. The latest Index of Industrial Production (IIP) numbers for April has added to the confusion. IIP is minus 0.1 per cent year-on-year (y-o-y), compared to the corresponding month last year. But, the eight core industries, which contribute 38 per cent weight to the IIP, are up by a huge 8.5 per cent y-o-y. Fertiliser and cement production are up and power generation is also up. However, manufacturing as a whole is down 3.1 per cent. Consumer durables are up 12 per cent y-o-y, while capital goods are down 25 per cent y-o-y.
Those numbers don't make sense. Some huge gains are offset by equally big losses. If manufacturing is down, who is consuming that extra power and buying that cement? More broadly, if industrial production is negative, exports are negative, bank credit is flat, corporate profits are minimal and agriculture is tottering after two drought years, where is that 7.6 per cent GDP growth coming from?
Value-add can in theory, compensate for absence of volume growth. But, where exactly is the value add? A coherent, convincing answer would help point us in the direction of profits, it is yet to come.
