GDP may grow 7.4%: India equals China but numbers tell a different tale

India’s economy would have grown at the fastest pace in the world, matching that of China, if the government’s advanced Gross Domestic Product (GDP) estimate of 7.4 percent growth for fiscal year 2015 comes true. China’s economy expanded at 7.4 per cent in the calendar year 2014.
To be sure, there is no fair comparison between Indian and Chinese economies given the vast difference in the size. But, at least the growth percentage figures offer a point of comparison.
According to the latest revised GDP numbers, based on the new gross value added (GVA) methodology, released by the government on Monday, Indian economy grew at a much faster pace of 6.9 per cent in fiscal year 2014 (compared with 4.7 per cent using the old method).
In the third quarter ending December, the economy grew at 7.5 per cent, tad lesser than the second quarter growth of 8.2 percent.
The sudden, new-found stature of India as a super-fast growing economy among world economies has left some economists to ponder over the fresh estimates. “We are still looking at the data to understand it fully,” said D K Joshi, chief economist at Crisil rating, Indian subsidiary of Standard and Poor’s.
According to Joshi, companies have tried to use their inputs more efficiently, which explains the lack of correlation between such high GDP numbers and the tepid growth in bank credit. One needs to probably rethink over the components that need to be correlated with the revised methodology to get an accurate picture.

Reuters

It is not just the economists, even the Reserve bank of India had refused to offer its point of view on the revised GDP numbers saying it is still studying the methodology. “We need to spend more time understanding the GDP numbers and will be watching the February 9 data,” RBI governor Raghuram Rajan had said last week.
Even, the government’s chief economic adviser, Arvind Subramanian, had expressed some amount of confusion with respect to the new GDP numbers, saying the new way of calculating GDP is “mystifying”.
“I am puzzled by the new GDP growth numbers,” Subramanian said last week.
Questions are raised on the revised numbers in the absence of any significant investment pick up, slow consumer demand and launch of fresh projects.
According to Madan Sabnavis , chief economist at Care Ratings some amount of caution is clearly warranted when one look at the revised growth numbers, on account of certain ‘anomalies’ seen in the components of revised GDP growth numbers and that of the actual situation on the ground.
For instance, manufacturing shows growth of 6.8 per cent for fiscal year 2015, “looks unlikely under the index of industrial production (IIP) which will probably be between 2-3 per cent,” Sabnavis said. The two should ideally converge, even though the difference can be attributed to the GDP being based on GVA, while IIP is on production.
Similarly, he points out a variation in the finance sector growth, which is to register growth of 13.7% per cent, while growth in deposits and credit appears to be very tardy.
“While these numbers (the revised GDP numbers) reinforce the view of the earlier series of improvement, the numbers get magnified significantly. Therefore, overall perception on economy should not be changing,” Sabnavis said.
While the revised GDP numbers are indeed encouraging and confirms to the belief that economy is indeed on course of recovery, there are a few indicators that do not go well with the super-growth story.
One, the bank credit growth, which is cited by most economists, as a proxy of actual economic activities on the ground, has remained nearly stagnant in the recent years and hasn’t seen any major pick up till this point.
For instance, bank lending to industry has grown by just 2.1 per cent for the fiscal year till December as compared with 8.1 per cent in the corresponding period in last year. Of that, credit growth to large companies stood at 1.8 per cent as compared with 7.7 per cent in the year-ago period. Deceleration in credit growth to industry was observed in all major sub-sectors, barring a few such as construction and beverages & tobacco.
Even in infrastructure segment, which consists of power, telecom and roads, loan growth has remained tepid at 6.8 per cent compared with 10.3 per cent a year back. Absence of a pick-up in fresh money flow to industries indicates some sort of mismatch in the GDP numbers and the actual situation on the ground.
Two, the level of stressed assets in the domestic economy doesn’t indicate an improving economic picture as yet. Stressed assets have only risen in the recent quarters as reflected in the earnings report cards of most banks, including the ones that announced earnings in the December quarter. Fresh slippages and the chunk of restructured loans have shown an increase raising doubts over the quality of recovery.
Also, the actual state of fiscal deficit in the economy still needs to be ascertained. For fiscal year 2015, GDP at current market prices will be Rs 126.5 lakh crore, lower than the Rs 129.5 lakh crore assumed in the budget.
What this would mean is that the absolute size of deficit, at an estimated 4.1 per cent, would be Rs 5.18 lakh crore instead of Rs 5.31 lakh crore projected in the budget, thus straining the perception of the government’s ability on quality fiscal consolidation.
As soon as the revised numbers were announced, former finance minister, P Chidambaram didn’t waste a day to claim that he did better during his term than what was perceived. Arun Jaitley too is likely to beat his own drum in the days ahead to claim his own share of victory in bring back the days of high economic growth.
But, for reasons mentioned above, the celebrations can perhaps wait a bit till the GDP numbers achieve the desired correlation with other critical factors in the economy and become more convincing.

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