The government has now made it known that GDP has grown from 7.2 per cent in the December 2015 quarter to 7.9 per cent in the March 2016 quarter. This should be a reason for much celebration, but the popular mood seems unmoved. For the statistical picture presented doesn’t seem to dovetail with the ground realities.
Let’s take a few important ground truths. Gross fixed capital formation (GFCF), which is the net increase in physical assets within a period, or very simply investment, is actually decreasing. It has been declining steadily since Q2 when it was 32.9 per cent of GDP, to 29.9 per cent in Q2 and 29.4 per cent in Q4. In the data released recently GFCF in Q4 is down by Rs 17,197 crore or contracted by 1.9 per cent. Moreover, government expenditure, while having increased by Rs 6,482 crore, has actually declined in comparison with Q4 in 2015 by about Rs 4,400 crore. So what is driving growth? During the UPA period we seemed to have had jobless growth. Are we now seeing investment-less growth?
Another worrying ground truth is the widening discrepancy between sectoral growths and GDP growth. Industry growth fell from 8.6 per cent in Q3 to 7.9 per cent in Q4, while the services sector slowed from 9.1 per cent in Q3 to 8.7 per cent in Q4. Only agriculture has reversed to trend from minus one per cent in Q3 to 2.3 per cent in Q4, after having tumbled down from two per cent in Q2.
During the past two years, vast parts of India has been gripped by a severe drought. Foodgrain production has remained largely dormant. It fell from 265.57 million tonnes (mt) in 2013-14 to 257.07 mt in 2014-15. It is expected to be 253.17 mt in 2015-16. There are visible signs of widespread distress in rural areas; the most visible manifestation is the rural migration to cities in search of jobs.
Yet the agriculture data suggests an optimism that flies against reality. Clearly, the quality of this data seems questionable, particularly since it is the one that eminently suits a practice that Chinese economists quaintly term as “adding water to the milk”, as it is largely dependent on subjective projections and assessments.
Two things stand out in the latest set of Q4 data. Private final consumption expenditure (PFCE) has shown a smart spurt from Rs 71.93 lakh crore in 2014-15 to Rs 80.76 lakh crore in 2015-16. A good part of this increase must be attributed to the huge jump in government wages and pensions (including OROP) by over Rs 110,000 crore last year alone. No wonder sales of bellwether industries like private and commercial vehicles and household appliances have shown an uptick.
Then there is another indicator that is worrisome. Credit growth has declined from 9.1 per cent to 8.4 per cent in the last year due to a slump in industrial credit demand. This suggests that while some sectors are clearly back on the growth path, this growth is being driven by segments of the population whose incomes have grown sharply in recent times. Must we thank the Seventh Pay Commission and OROP for this?
There is something else that is very worrisome. This is the sharp increase in a budgetary item called “discrepancies” These were Rs 143,000 crore in Q4 2016, while they were Rs 29,933 crore in Q4 2015; a difference of over Rs 113,000 crore. This means the growth in “discrepancies” was very slightly less than the Q4 growth of Rs 127,000 crores in PFCE, or consumption. In other words, “discrepancies” contributed almost 50 per cent of GDP growth. This is like the “miscellaneous” item in business accounting. Every year there is a provision for it, but when “miscellaneous” rises to many times over the usually expected, auditors have to take notice. On an annualised basis this shaves off almost one per cent of GDP growth, making the expected annual GDP growth 6.9 per cent instead of the 7.9 per cent, which finance minister Arun Jaitley is talking about.
Now a little explanation seems to be in order. Gross domestic product measures output as the sum of final expenditures — consumer spending, private investment, net exports, and government consumption and investment. Gross domestic income (GDI) measures output as the sum of the costs incurred and the incomes earned in the production of GDP.
In theory, GDP should equal GDI; in reality, they are different because their components are estimated using mostly different and less-than-perfect data sources. In national income accounting, the difference between GDP and GDI is called the “statistical discrepancy”; and it is the factor “x” which balances the GDP=GDI equation. Economists also know this item as the official fudge factor. Since it’s a contrivance to balance GDP and GDI, the temptation to inflate it is real, particularly when you are desperate to show performance.
Now consider this too. In February 2015, the government gave itself a little bonus by tweaking the methodology of computing GDP to put economic growth at a higher trajectory by 2.2 per cent. Too bad it was not announced by the Manmohan Singh government one year earlier because then the growth in its last year would have been a good-looking 6.9 per cent instead of the dismal 4.7 per cent which Prime Minister Narendra Modi pilloried. Take out this bonus and take out “discrepancies”, we take out a huge 3.2 per cent from the 7.9 per cent GDP growth being tom-tomed. This suggests that GDP growth is actually around 4.7 per cent.
But there are encouraging signs too. Latest corporate results show that profits are rising. The FE’s study of about 1,200 companies shows that Q4 profits rose by almost 42 per cent, while sales rose only by 4.20 per cent. A Crisil study for financial year 2016 tracking results of 642 companies representing almost 72 per cent of the NSE’s market capitalisation, shows profits rose by 16.7 per cent to Rs 178,833 crore, while revenues rose only 2.5 per cent to Rs 22,98,030 crore. Clearly, the prospects for investment are now brighter as Q4 results are heartening. But we must wait a bit for those results to be seen.
With Q4 corporate profits showing a smart upturn and the Indian Meteorological Department (IMD) categorically pronouncing “zero chance of deficient rains”, we have good reason to be optimistic about. Hopefully this will be the season of inflection for the Indian economy. In usual times the IMD’s predictions have as much credibility as the neighbourhood astrologer. But we know from the past that after two bad years the probability of a good monsoon becomes very high. Governments come and go, but it is the monsoons that still determine economic outcomes.
Economies don’t shift trajectories easily and quickly. India has shown the ability to be on a high trajectory before. The entire UPA 1&2 period was a period of unprecedented growth, averaging 7.8 per cent. But UPA 1&2 also sowed the seeds for our present slowdown by spending increasingly more on subsidies, mostly unmerited, rather than on capital expenditure. The Modi government needs to urgently reverse this. But it has studiously shirked from this, as philosophically the Rashtriya Swayamsevak Sangh too shares much of the misguided populism that emphasises indulging sundry citizen appetites rather than on investing in growth and the future. If subsidies (merited) were mostly for education and health, that too would have left better placed us for a faster growth.
Higher growth rates will happen, but for that the government must do the right things first. That will come by making investments in human capital and in productive job creation. Since capital is always the constraint, it must be judiciously used. Fudging data will only create an interim illusion of well-being. Since reality catches up sooner or later, it is better to grapple with it now and rely on the illusion in 2019.
