Have we grown that fast? Making sense of India's new GDP numbers
India is projected to grow by 7.5% in 2015, over 7.3% in 2014 and maintain that pace in 2016. China will dip to 6.8% from 7.4% in 2014, and will continue to slide in 2016.(Illustration: Abhimanyu Sinha)
Everyone — from ministers and bureaucrats in the central government to its advisors and fan-boys — is understandably chuffed about how fast India’s economy grew last year.
At 7.3% India’s GDP growth rate during 2014-15 was the highest in the world; and, if you consider the final quarter of that period (Jan-Mar 2015), the growth rate in inflation-adjusted terms works out to 7.5%, a good half a percentage point higher than what China’s growth was during the same time. But have we really grown that fast?
Or is there something else that we ought to take into account, such as the new formula for calculating India’s GDP — a change that was made from last year?
First, here’s a bit about the new formula. Before it was changed last year, the goods produced or traded that make up one part of India’s GDP (the other parts are made up of farm output and services) were measured by aggregating factory output — by counting the number of units produced and traded by companies.
Under the new formula, it is the value and not the number of units of factory output that is aggregated to get a measure of the goods produced.
Does that make a difference? It does.
A simple (and perhaps, simplistic) example is of a car factory. If it produces and sells the same number of cars this year as it did last year but improves the per unit value of the car (think upgrades or higher value models) then under the new formula, it would contribute to a higher growth rate, but because there is no increase in the actual number of units produced, it may not have grown at all under the old formula.
There are other problems with the old formula. It used the Index of Industrial Production (IIP), which estimates the value of output by taking one sample from each industry and assigning a single weight to calculate value.
For example, it takes the output of one car factory and no matter how many different models it makes, uses one weighted average price to calculate value and then
extrapolates that to get car industry output.
Another problem: the preliminary estimates of the old GDP series that used IIP data were derived from a database of less than 5,000 companies, which were then extrapolated to get the final estimates.
The new formula relies on more exhaustive data. Under a new ministry of corporate affairs (MCA) guideline, all companies (500,000 already have and more are signing up) have to upload balance sheet data on the MCA’s records and this captures the value added by all activities of manufacturing, trading and even marketing.
All of this means the new method for computing GDP, which takes 2011-12 (when GDP grew 6.7%) as the base year, has bumped up India’s estimates of growth. In 2012-13, the new formula estimates growth at 5.1% (under the old one, it was 4.5%); in 2013-14, it is 6.9% (the old estimate was 4.7%); and, as we all know by the high-decibel crowing that came in its wake, in 2014-15, it was 7.3%.
There’s obviously no ‘old data’ for 2014-15 but estimates suggest that the old method may have pegged growth at 6.3-6.8%. All of this may mean something else too.
Last week, FM Arun Jaitley told US investors that India could attain double-digit growth soon. He wasn’t kidding. Because what’s 10% now could’ve been just 8% before!
Unfortunately, economic growth is not all about how it is measured. And the first couple of months of 2015-16 haven’t exactly been promising: domestic car sales grew 18% in April but only 7.7% in May; exports and imports — both an index of economic activity — slumped in May; and despite last year’s 7.3% growth, most indicators show that consumer spending and investment continues to be sluggish.
Another measure of economic development also seems dismal: jobs.
Between December 2013 and December 2014, India added an impressive 421,000 jobs but that figure is a mere drop if you consider that every year there are 15 million Indians who join the ranks of those who are seeking jobs.
If 10 is to really be the new 8, many things have to change — not merely a formula.
(Sanjoy Narayan is the Editor-in-chief of Hindustan Times. He tweets from the handle @sanjoynarayan. )
With India's economic prospects looking up, need to keep up momentum
Path to 10% growth not impossible, says JaitleySource: www.hindustantimes.com