What GDP at 7.3% shows: Modi govt’s political common sense works well for …

30 May 2015 | Author: | No comments yet »

CSO released Provisional Estimates of National Income for FY 2014-15.

The 7.5 per cent growth in Gross Domestic Product (GDP) recorded in the fourth quarter (the number for the full fiscal year 2015 is 7.3 per cent) theoretically makes India the fastest growing major economy in the world, beating China (the Chinese economy grew 7 per cent in the March quarter and 7.4 per cent for the full calendar year 2014) and far ahead of other comparable economies.New Delhi: By posting 7.5% GDP growth for the January-March 2015 period, India has emerged as one of the world’s fastest growing economy, outstripping China’s 7% growth in the same quarter,according to data released by the government on Friday .

The Central Statistics Office (CSO) on 29 May 2015 released the provisional estimates (PE) of national income for the financial year (FY) 2014-15 both at constant (2011-12) and current prices. For the Reserve Bank of India (RBI), which will announce its monetary policy on Tuesday, the GDP numbers are unlikely to claim any major influence on its rate cut stance. Economists were already having a hard time reconciling the headline numbers with dismal corporate earnings, weak industrial activity and an elusive recovery in bank credit. As this report shows, the sectors which have done much better in 2014-15 than in 2013-14 are manufacturing, the utilities (electricity, gas, water supply etc), construction (though there has been a decline quarter on quarter) and financial, real estate and professional services. Now, if one accepts the current government’s 7.3 percent as true then one has to accept the previous government’s 6.9 too because methodology and numbers are neutral quantities.

In 2014-15, real Gross Value Added (GVA), that is, GVA at basic constant prices is estimated at 98.27 lakh crore rupees and growth rate is estimated at 7.2 percent. Questions will be raised about the manufacturing growth figure of 7.1 per cent since the index of industrial production (IIP) showed a growth of just 2.3 percent. The per capita net national income in real terms (constant prices) during 2014-15 is estimated to have attained a level of 74104 rupees as against 69959 rupees in FY 2013-14 (RE). It could be argued that the gap between the potential of the economy and actual delivery is massive, but that’s a matter of subjective interpretation.

But the Statistics Office’s reworking of the numbers has transformed India’s official growth pace under Prime Minister Narendra Modi, who made economic reforms a priority during his first year in office. “I think there are methodological issues. The wholesale price index (WPI), in respect of the groups, food articles, manufactured products, electricity and all commodities, has risen by 6.1 per cent, 2.4 per cent, 5.7 per cent and 2.0 per cent, respectively during 2014-15. That is why there is a variance between the volume indicators available at the ground level and value indicators which are being increasingly used in the computation of the GDP. “Hence policy makers are likely to infer the growth momentum from other lead indicators like industrial production, non-oil non-gold imports, and PMIs (purchasing managers indexes). In terms of GDP, the rates of Gross Fixed Capital Formation (GFCF) at current and constant prices during 2014-15 are estimated at 28.7 percent and 30.0 percent, respectively, as against the corresponding rates of 29.7 percent and 30.7 percent, respectively in 2013-14.

This is when China has decelerated from 10 percent plus in the last three decades to the sub eight territory in recent years and looks set for a prolonged low growth period, the US is still reviving at five percent and the rest of the world is performing poorly. We reckon Tuesday’s rate cut is still on the table. “This data is based on value-added, so it is difficult to feel and correlate with what is happening to high frequency data like credit growth, rural and urban wages and passenger car sales, which are all still weak. “RBI will have to feel its way in the economy to get an idea about prices and be confident about their inflation projection. Certainly the government can take credit for some of the decline in inflation, though the fall in global oil and commodity prices also played its part. What the numbers suggest is India has managed to maintain a steady growth momentum despite the blip over a couple of years due to global headwinds and policy chaos at home. On these measures, the case for further policy loosening remains strong. “The GVA (gross value added), however, has a different story to tell, showing a marked sequential slowdown from Q2 onwards, implying that larger growth has come on account of net taxes on products. “Worries of disconnect persist.

According to Devendra Pant, chief economist at India Ratings, the fact that food inflation did not shoot up in March and April after the unseasonal rains has given some confidence to the rational consumer. State Bank of India’s chief economic advisor Saumya Kanti Ghosh points out in an Ecowrap report that growth in both per capita gross national disposable income (GNDI, or income available for spending after paying taxes) and in per capita private final consumption expenditure (PFCE) has declined.

Given that higher public spending is key to reboot growth, the NDA’s obsession with fiscal deficit numbers is something that can potentially delay the growth recovery on the ground. Second, some economists have begun sounding caution on the sharp downward revision in the third quarter number (revised downwards to 6.6 per cent from 7.5 per cent) saying this signals the beginning of further slowdown in the second half of last fiscal year. However, despite the current slowdown, at 10.3 trillion US dollars China’s economy is five times bigger than India, while the USA remains the world’s largest economy at 17.4 trillion US dollars. The numbers may please rating agencies and investors but without percolation of the benefits of the growth process deep enough it guarantees no political return. The prime minister and Finance Minister Arun Jaitley have been facing flak from even their biggest supporters for being incrementalists in their approach rather than being bold.

The factory output numbers for the recent months, bank credit growth and the movement trend of the stressed assets in the banking system indicate things haven’t really improved. Industry is hoping for public investment to lead the way (Subramaniam has been talking about this), but the compulsions of fiscal consolidation may prove a hurdle. The stark contrast between the GDP figures and ground reality should be questioned. “The higher growth number in value added in sectors like manufacturing and services like finance, trade, transport, etc. have pushed growth up. However, these numbers do not adequately reflect the lower growth numbers in IIP (Index of Industrial Production) or the banking business numbers,” a note from rating agency, Care, said.

Agriculture accounts for only 15 per cent of GDP and may not pull down the aggregate numbers hugely, but rural demand still drives overall demand and so is an area of concern. Data sourced from corporate debt restructuring cell (CDR), a forum of banks that takes up cases of large restructuring proposals, shows that Rs 57,000 crore worth restructured assets were tagged as failed loans and accounts that failed to recover despite recasts, at the end of March quarter.

Their cheerleaders would like the Modi-Jaitley duo to go for political confrontation to push through a radical economic agenda to pitchfork growth to a higher orbit. There is gradual realization that confrontation does not help, particularly when there are more areas of convergence than divergence in economic thinking among a large section of the political class.

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