There are broadly two views on the Indian economy. One is untrammelled boosterism, the dream of becoming a US$5trn (trillion) economy, delivered by an ostensible era of perpetual prosperity, supported by a set of rosy data. Another view is sceptical of such an inference, based on a different data set. There are enough data points to support both sides which makes for, what I call, an economic data fog, leaving us confused about where the economy is truly headed.
Consider the growth of gross domestic product (GDP). GDP growth is seen to be the biggest and the most important piece of data that points to the overall trajectory of the economy. For the first three months of this year, the nominal growth in GDP was just 8% while real GDP growth was 7.8% implying that inflation was just 0.2%. As anyone knows, this does not pass the smell test because inflation is not that low.
But the government has a ready explanation. Real GDP (adjusted for inflation) is arrived at by applying 'GDP deflator' to nominal GDP. India’s deflator is dominated by the wholesale price index. And WPI has indeed fallen sharply, leading to a very low GDP deflator of 0.2%, boosting real GDP. This has immediately invited criticism, both on how India calculates its GDP growth and also on the validity of using WPI as the GDP deflator.
GDP Growth: India uses the income or production approach to calculate GDP as opposed to the expenditure method (used in the US) and a blended method (in Germany, UK and Australia), states Ashoka Mody, visiting professor of international economic policy at Princeton University, writing in a Project Syndicate column. “In principle, expenditure should equal income earned, because producers can earn incomes only when others buy their output,” he writes, but “while income from production increased at an annual 7.8% rate in April-June, expenditure rose by only 1.4%.”
This difference is too wide and needs to be accounted for. The government claims that, since it has been consistent with its approach (in using income data), there is nothing to question here. Mr Mody argues that if we apply the US bureau of economic affairs method to Indian data, the recent growth rate falls from the headline 7.8% to 4.5%.
Inflation: What about the inflation or GDP deflator? Arvind Subramanian and Josh Felman writing for this paper are also sceptical of the 7.8% GDP growth figure, but for a different reason. They cast doubt on the 0.2% GDP deflator. We cannot assume that inflation is being measured properly, they argue. “GDP deflator is not hard data. It is not measured directly, like the consumer price index (CPI); it is instead a derived number, calculated through a methodology that has well-known problems.”
The authors go on to list several flaws with how the GDP deflator is calculated and argue that while the GDP deflator will never be the same as CPI, “in the other major economies the difference between the two measures has been small.” If GDP inflation is based on something close to CPI, then India recorded much higher growth in earlier quarters but only around 3% growth in the last quarter (assuming CPI to be 5%). Maybe the economy is doing better than what the numbers capture. Maybe worse. We just don’t know. The quality of the data is not good enough. The ministry of finance itself admits to problems of using some of the traditionally gathered data. A few days ago it posted on X.com, “If anything, India’s growth numbers might understate the reality because manufacturing growth indicated by the Index of Industrial Production is far lower than what manufacturing companies are reporting.”
Other Data: To get a better picture of India’s growth, one will have to look at an array of data, some of which are more reliable such as direct tax revenues, e-way bills, GST collections, rail traffic and external trade. On September 22, the government released its monthly economic review. The data for the first five months of the year does not present a picture of great buoyancy. On the positive side, GST collection increased by 11%, e-way bill volume was up 16.7%, cement and steel production was strong and bank credit expanded by 19.7%. But gross tax revenues increased by only 2.8% (April-July), the index of industrial production was up only 4.8% (April-July), power consumption was up 5%, rail traffic was up only 2.2% and, most importantly, overall exports were down 5.21% and imports down 10.35%. Merchandise exports, reflecting India’s poor competitiveness (which remains unaddressed), were down 11.8%.
The picture of the Indian economy is one of near-stagnation between 2011-2020, a massive bounce back in the immediate post-pandemic period and now muted growth. What has sustained India’s economic growth in the last few quarters is the humungous government capital expenditure (capex) simultaneously deployed in multiple directions: defence, railways, urban transport, logistics and other infrastructure projects. This strategy of creating growth through government capex is not sustainable in isolation. It depends on continued high tax collections which, in turn, depends on high economic growth. And high growth is not a given, based on current data. Note that in the first five months of this year, fiscal deficit and revenue deficit have shot up due to low tax revenues. Those who are sanguine about the government’s capex-driven growth may want to keep an eye on growth in tax revenues and government borrowing to fund it.
(This article first appeared in Business Standard newspaper)
It requires tremendous effort to stop the rotation of a fly-wheel, leave alone making it turn in the other direction. Unless the effort comes from a ruthless source that doesn’t care who gets crushed under the fly-wheel. It is unlikely that the aam janata will let this happen. It is equally unlikely that those running the government – from whichever party – will let things go the Lebanon-Sri Lanka-Argentina-Columbia-Nigeria-Pakistan-etc way. The most likely scenario is that of incremental progress and growth however unexciting and frustrating that prospect is to some.
This government has perfected the art of story telling. As an integral part, they have managed to threaten and bring most of the media on to their side. Tell a lie again and again. Story becomes a fact. Inflation in food prices , rent and services are visible to each one of us. But then, the BJP voter does not care. For him, it is party first -
One of the biggest result of growth is job creation unemployment rate in India is now at 7.5 percent arlt 7 percent growth rate whereas in eurozone unemployment is also at 7 percent but the growth rate is negative how can a economy having 7 percent growth rate have a 7.5 percent unemployment rate the numbers of this government are clearly wrong
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