GDP stats mask economic reality

To many who watch the economy closely, this year is significant because the nominal gross GDP growth rate has fallen to a 10-year low of 5.2 per cent. The main difference between nominal and real GDP is that the latter is adjusted for inflation. Hence, nominal GDP often appears higher than real GDP.

While most corporates are reporting flattening sales and falling profits, the government is crowing from the rooftops that real GDP is growing at 7.4 per cent. But nominal GDP growth rate is a measure of current market prices. For much of the past decade, India’s nominal GDP growth was in the 10-15 per cent range and corporate profitability growth was also in that range.

Since inflation used to be in the 4-8 per cent range, real GDP was in the 6-9 per cent range. The problem with the present year is that nominal GDP — the GDP before inflation — has fallen to a low of 5.2 per cent, and since inflation (wholesale price index) has become negative 2.2 per cent, the real GDP is at 7.2 per cent. But the popular mood is determined by profitability and not by economic legerdemain.

If inflation were positive, then real GDP growth would have been less than 5.2 per cent. Periods of optimism and buoyancy are when prices are rising, sales are rising and profits are rising. All this implies some inflation. That’s why most economists, businessmen and politicians maintain that moderate inflation levels are needed to drive consumption, as higher levels of spending are crucial for economic growth.

The US Federal Reserve typically targets an annual rate of inflation for the country, believing that a slowly increasing price level keeps businesses profitable and prevents consumers from waiting for lower prices. Most economists believe the primary function of inflation is to prevent deflation. We have deflation now.

Nominal gross value added (GVA) is the measure of the value of goods and services produced in an area, industry or sector of an economy. In the first half of 2014-15 nominal GVA was at 13.7 per cent. In the first half of 2015-16 nominal GVA is 6.2 per cent. But inflation was almost 5 per cent last year and it is a negative 2 per cent this year. This deflation has been primarily caused by the global collapse of commodity prices. Prices of oil, steel, copper, aluminium and coal among others have fallen to their lowest levels in many years.

In the real world, nominal growth matters much more than the inflation-adjusted real growth. To a firm’s revenue, whether from realisations from current sales or projections for future, cash flows and investments; real growth hardly matters. Nominal growth matters for the government too, since tax revenues are also affected by deflation. The sharp decline in direct tax collections is a sign of this.

As it is, the GDP growth rate was tweaked a bit by this government in February 2015, to put India on a higher trajectory, giving itself an added 2.2 per cent growth as a bonus. If this were done in the last year of the Manmohan Singh government, the growth would have been a good-looking 6.9 per cent instead of the dismal 4.7 per cent calculated then. It just means that in the year and a half since the United Progressive Alliance went out, the GDP has grown a mere 0.5 per cent. But this government claims a healthy GDP growth of 7.4 per cent allowing it to crow about outpacing China.

The automotive and construction sectors are the bellwethers of economic prosperity. There is mixed news from the automotive sector. The industry produced a total 14.25 million vehicles including passenger vehicles, commercial vehicles, three wheelers and two wheelers in April-October 2015 as against 13.83 in April-October 2014, registering a marginal growth of 3.07 per cent year-on-year.

The car companies have dispatched about 2.33 lakh cars in November compared to 2.11 lakh units in same period a year ago. Until October 2015, tractor sales continued to fall for the 13th consecutive month. For the first seven months of 2015, tractor sales fell by 19.5 per cent. But the real indicator of widespread buoyancy is the two-wheeler industry. The news here is not so good. India and the world’s largest two-wheeler maker, Hero MotoCorp, posted near flat sales, while at its nearest rival, Honda motorcycle and scooter, domestic sales fell nearly 12 per cent.

The construction sector is one of the largest seasonal employment providers in India next only to agriculture, creating about 50 million jobs either directly or indirectly. The sector is mostly unorganised and more than 80 per cent of employment in building and construction sector is minimally skilled workforce. India adds one million people to its workforce every month and the growth of the construction sector is imperative to economic well-being, both because of the size of employment and the huge absorption of unskilled labour.

The demand projections promise a healthy outlook for this sector. The shortage of urban houses stood at 18.8 million units in 2012 and it is expected to grow at a compounded annual growth rate of 6.6 per cent for 10 years till 2022, when it will reach 34.1 million.

However, developers in the country’s property markets have been struggling with slow sales, high unsold inventory, delayed construction and stalled projects. Rising inventory levels in a country where housing shortage is such a critical issue indicates that the supply that is available is unaffordable to many.

For instance, Mumbai has a projected shortage of two million homes, but is unable to sell half its inventory pile-up because of unaffordable prices. Home sales in Mumbai dipped 9 per cent to 28,446 units and new launches dropped 47 per cent to 18,887 units. The country’s largest property market, the national capital region (NCR), has a pile-up of inventory that would take close to 78 months to clear at the current pace of sales. Unsold inventory in the NCR rose 12.63 per cent to 235,908 apartments from a year ago.

Clearly the sector needs a more liberal credit policy to encourage families to invest in property. Investment — domestic and foreign — is not the issue. Yet the government seems focused on attracting investment, when the problem is to generate demand.

Gross non-performing assets (NPA) of banks grew to 4.8 per cent as of the quarter ended September, from 4.4 per cent in the previous three months, according to domestic rating agency ICRA. According to Union finance minister Arun Jaitley, gross NPA’s of state-run banks rose 25.19 per cent year-on-year to '3.14 lakh crore in September 2015, constituting 5.64 per cent of total advances. Consequently, banks’ credit growth dropped to a multi-year low of 8.8 per cent. Of this, credit to industry declined to 4.9 per cent.

Ironically, the data comes a day after the Central Statistics Office released the GDP data for the September quarter that showed a marked 9.3 per cent increase in manufacturing in the period. But if that were so, bank credit to industry too should be keeping pace, which it is not.

This is the season of celebration. But there seems to be less reason for cheer. We can tweak data and present them in more optically friendly terms. But as they say the proof of the pudding is in the eating. And the people are not biting. Whether it is cars and motorbikes, or homes.

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy