An anomaly is something that deviates from the expected. In nature this can refer to several phenomena that cannot be explained by known natural laws. In Prime Minister Narendra Modi’s India, the growth figures put out by the government fall into this category. The new method of calculating GDP implemented by the Modi government soon after its May 2014 victory instantly lifted India’s GDP growth to 7.3 per cent, compared with 5.5 per cent under the old series. The new methodology appears questionable given that GDP numbers and data like auto sales, growth in bank credit, corporate profits, consumer goods sales, etc seem to move in opposite directions, defying conventional economic logic.
By juggling numbers the government was able to claim “achche din” had come, and the new government had moved the economy to high growth. This was not seen in the reality on the ground. Thus, for instance, GDP growth of near-8 per cent, close to records achieved in the boom years 2004-2008, find no reflection in other economic data. In that period of high growth, companies showed profit growth of over 20 per cent, and revenue increase of nearly as much. This is now down to low single digits.
Despite the government’s claim of achieving 7.9 per cent growth in the quarter ending March 2016, this conflicts with economic indicators. For instance, investment has fallen from 33.4 per cent in 2012-13 to 29.4 per cent in 2015-16; agriculture is stagnating after two successive drought years and farm sector imports of corn and lentils have reached record levels; exports have fallen 17.6 per cent in this year, having a sizeable impact on growth; bank credit has grown between nine to 11 per cent in the last two years, in contrast with an average annual growth of over 20 per cent in the last decade; bad loans, mainly by big borrowers, have risen substantially; and while GDP data for the current year estimated manufacturing sector growth in October-December at an annual 12.6 per cent, the latest Index of Industrial Production (IIP) numbers released early 2016 point to a mere 0.9 per cent rise in the manufacturing sector during the quarter.
The confusion over the growth rate has led to alternative growth models. Citigroup developed a map of 18 economic activities, under which growth would more closely correspond with trends under the old GDP calculation method, in which India’s GDP grew 5 per cent and it felt the growth rate would range between 5 and 6 per cent rather than the 7-8 per cent claimed. The Reserve Bank too is turning to hybrid models that mix elements of the old and new GDP methods to get a better picture of the economy. Many economists feel it does not seem we are growing at 7-8 per cent. They note the disconnect between the new set of GDP numbers and high frequency macro-economic indicators in the economy. These include bank credit growth, corporate performance, auto sales, factory output and growth in manufacturing that should ideally correlate with the GDP figures.
The disquiet has reached the topmost levels. In January, RBI governor Raghuram Rajan, speaking at the Indira Gandhi Institute of Development Research, Mumbai, admitted the figures could be dodgy, saying “there are problems with the way we count GDP”. Chief economic adviser Arvind Subramanian has admitted he is puzzled and mystified by the revised estimates based on a new methodology, because “these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy”.
The “fudging” has continued, with GDP figures for the latest quarter ending March 2016. Here the GDP growth rate is shown as 7.9 per cent, to bring the yearly average to the 7.6 per cent target. Even this may be dodgy. The questions around the new GDP figures for March 2016 quarter revolve around what are called “discrepancies”. These discrepancies have grown to Rs 1.43 lakh crore in the latest quarter, from Rs 29,900 crore a year ago. The growth in these “discrepancies” was around Rs 1.13 lakh crore, just a little lower than the growth of Rs 1.27 lakh crore of private consumption expenditure and over half the total GDP growth of Rs 2.22 lakh crore.
If these “discrepancies” are removed from the addition to GDP in the March 2016 quarter, GDP growth at constant would only be 3.9 per cent, or half the final government figure of 7.9 per cent. While this may be just an exaggeration, the figure for “discrepancies” is being taken seriously by the world’s largest investment banks. Goldman Sachs, the largest investment banker in the world, notes “a significant fraction of headline GDP growth is unexplained as ‘discrepancies’ (discrepancy is the difference with industry GDP data, which are used as the control).”
Similarly, Societe General, one of the top French banks, noted in its analysis: “Unfortunately, discrepancy was the other major growth driver, raising questions about the continued poor quality of data. Discrepancy was as high as 4.8 per cent of GDP, the highest ever in the history of the new data series, and accounted for virtually 50 per cent of the increase in real GDP.”
The GDP figures released by the government cannot be trusted unless it explains to Parliament’s satisfaction what the “discrepancies” mean and how it intends to justify them.
The writer is a Mumbai-based freelance journalist
