Priyanka Kishore, Lead Asia Economist at Oxford Economics tells Business Today why India's GDP may well not be 7 per cent. Excerpts from an interview.
What were the reasons that prompted you to relook at India's growth numbers?
India announced a revamped GDP series in early 2015, based on the requirements of the 2008 System of National Accounts (SNA). The new method made substantial changes to both the estimation and reporting of GDP. Prima facie, these are positive changes. But they have pushed India's growth rate to 7 per cent from 5 per cent overnight. Such a large change is puzzling, especially as it is not corroborated by trends in other economic indicators.
In what areas did you find major discrepancies? How and why?
The mis-measurement appears to be most pronounced in the manufacturing sector. Our bottom-up indicator for industry value added suggests that manufacturing has been growing at an annual average rate of 3 per cent between 2013 and 2016, and not the 5.5 per cent pace that the national accounts indicate. Services growth is also overstated, but to a lesser extent than manufacturing.
Is this the first time that authenticity of GDP data released by the Indian government is under the scanner? If so, why? What is really going wrong with the calculation?
The new GDP data has several puzzling characteristics. At an aggregate level, the series shows a moderation in nominal GDP growth over the last five years. However, this is not matched by the real GDP data, which show a clear pick-up. Part of the problem is down to the construction of the deflators. India's deflators are more aligned to wholesale prices (WPI) and, thus, tend to exaggerate decline in prices when the WPI is contracting. This is especially true for services, where prices are elevated and sticky according to the CPI. In fact, services are not even covered by the WPI. Yet, the services deflator indicates a high correlation with the latter.
Moreover, there is a clear dissonance between the national accounts and on-the-ground evidence, particularly for the manufacturing sector. Some discrepancy between the IIP and GVA (gross value added) manufacturing is likely. Firstly, IIP is a volume index. Secondly, the IIP is based on Annual Survey of Industries (ASI), while manufacturing GVA is calculated on a broader MCA 21 database. The latter may also partly account for the difference in the old and new manufacturing growth figures. The SNA System of National Accounts 1993 estimated manufacturing growth based on IIP and ASI. But the substantial divergence between the output of key industries, IIP and the new GVA manufacturing is striking. And raises some important questions about the veracity of manufacturing estimates that are not convincingly explained by just a shift to a broader company database
As per your research, what is the GDP growth like in FY 16? And what will be the projected GDP growth like for FY 17?
Our bottom-up estimate yields a growth rate of 5.8 per cent for India in FY16, as opposed to the official figure of 7.6 per cent. Moreover, we find that India's growth slowed substantially between FY15 and FY16, while the national accounts show a mild pick up.
From a top-down perspective, which is based on the national accounts, we expect growth to moderate in FY17 because of the outsized role played by "discrepancies" in the previous year. But aside from that, the underlying dynamics point towards a possible improvement in the growth picture.
What are the reasons why Indian growth slipped between FY 15 and FY 16?
The deceleration is largely because of the manufacturing sector, which we think grew at less than half the rate indicated by the national accounts. While services growth also moderated, the divergence from the headline statistics was not as marked.
What will be the sectors that will do well in FY 17?
Indicators for consumption and services show that the key drivers of the economy may now be picking up speed. The evidence for manufacturing and investment is still patchy - but the low point has probably been passed.