Download ARE WE REALLY THE FASTEST GROWING MAJOR ECONOMY?

ARE WE REALLY THE FASTEST
GROWING MAJOR ECONOMY?
-VINIT KHANDELWAL
India’s GDP 2015-16
India’s GDP growth bounded towards 7.6 % in the last fiscal, which reinforces
India’s positions as the world’s largest growing major economy. Against
Expectation of 7.6%, the March quarter growth stood at 7.9%. But when we see
the sector wise growth, it shows a completely different story.The data released
recently shows that gross fixed capital formation in Quarter 4, 2015-16 has
contracted by 1.9% as compared to Quarter 3. Industrial growth rate has plunged
from 8.6% in December Quarter to 7.9% in Q4. The services sector too has slowed
down to 8.7% in Q4 from 9.1% in the previous Quarter. With these figures it’s
difficult to find out how a growth of 7.9% is possible in the March quarter.
Agriculture has seen a positive trend from -1% in Q3 to 2.3% in Q4 but this does
not assuage with the ground situation. During the past two years India have been
gripped by deficit monsoon. Clearly, the quality of this data seems questionable.
The tremendous GDP figure of India is happening at a time when almost the entire
world is experiencing a sluggish growth rate. Even china is experiencing the least
growth rate since the last many years. Let’s see whether India should be happy
with its GDP figures and is India really the fastest growing major economy in the
world?
Economic figures which contrast with the GDP figures
Many economists say growth is nowhere near as strong as the data suggest. The
other performance indicators show the economy is still struggling to gain
momentum. These includes bank credit growth, corporate performance, auto sales,
factory output and growth in the manufacturing sector that should ideally correlate
with the GDP figure. The fact is that there are serious concerns on growth on the
ground. There are a few reasons that tell us why the high GDP numbers aren't
mirroring the actual situation on ground.
INDIA’S EXPORT
India’s merchandise exports is contracting for almost last two years in a row
amid tepid global demand and a volatile global currency market.Low
commodity prices and a global slowdown, driven by faltering Chinese
economy, is all set to take exports to shrink more in future.
Source: Ministry of commerce and Industry
CORPORATE PROFITS
Profits of listed Indian companies have remained stagnant or declining for
some time now. On the other hand, nominal gross domestic product (GDP)
has increased. Hence, corporate earnings expressed as a percentage of GDP
is declining .In fact, the measure has consistently declined since 2009-10.
Currently, it is lower than the long-period average of 5%.
www.firstpost.com
BANK LOAN GROWTH
Bank loan growth refers to the year-over-year change of the overall commercial
banks credit to the economy, including food credit, non-food credit and loans, cash
credit and overdraft. Loan Growth in India is reported by the Reserve Bank of
India.The bank loan finance the industrial sector. It also helps in developing the
capital market for India. The bank loan growth is falling in recent years which is a
bad sign for the economy. For the revival of the economic growth bank loan is
must.Going by the latest RBI data, bank lending to industries has grown by 4.6
percent in the 12 months till October 2015 compared with 7.8 percent in the
corresponding period in the previous year.
NON PERFORMING ASSETS
The total Gross Non Performing Assets (GNPAs) of banks stood at 5,94,929crores
as on March 2016, marking a substantial jump of about 2,00,000crores in just one
quarter. Over 90 per cent of this is on the books of public-sector banks (PSBs).
Total stressed assets (bad and restructured assets) in the banking sector has risen to
12 per cent of the total bank loans, while gross NPAs of the banking sector, as a
percentage of total loans, could reach 5.4% by September 2016, according to the
RBI's financial stability report (FSR) from 5.1% in September 2015. Stress in the
banking sector has resulted in lower credit flow to productive sectors. This
scenario inflects a crisis for public sector banks and for the economy too.
MANUFACTURING SECTOR
The Nikkei Manufacturing PMI in India rose to 51.7 in June of 2016 from 50.7 in
May. Though Indian manufacturers are increasing activity, the pace of expansion is
weak. A PMI reading above 50 indicates an expansion of the manufacturing sector
compared to the previous month; below 50 represents a contraction; while 50
indicates no change. The economy has been hampered by the drop in the public
and private investment. Raghu ram Rajan mentioned about factories working at
30% below their capacity. The private company are in no hurry to install new
projects.This suggests a significant slack in the economy. Table below is of PMI.
Source: www.tradingeconomics.com
DEFICIT MONSOONS
For two years in a row India has had a deficient monsoon. In its end of season
report, the India Meteorological Department (IMD), the nation’s weather
forecaster, stated that “rainfall over the country as a whole was 86% of its long
period average (LPA). Thus years 2014 & 2015 was the fourth case of two
consecutive all India deficient monsoon years during the last 115 years.” How such
growth rate is possible then. Given that most of the Indian population is dependent
on agriculture, this has led to fall in the consumer demand in rural India.
AUTO SALES
Although there is an improvement in the car sales in recent quarters, the twowheeler sales have tumbled. In the December quarter of last fiscal, the two-wheeler
sales have shown a decline. This indicates tepid consumer demand.
NEW ORDERS
RBI’s OBICUS also showed that growth in manufacturing firms’ new orders was
also shrinking. This typically means there isn’t enough new business in the market.
Reasons behind high GDP numbers
NEW METHOD OF GDP CALCULATION
In India, hot debates are brewing up regarding GDP calculation in the new series
with 2011-12 as the base year from 2004-05.The government made some major
changes in the way it measures GDP in January last year, which resulted in a bump
in growth rates and presented a much rosier economic picture.
1. Earlier, data from the Annual Survey of Industries (ASI) was used to gauge
activity in the manufacturing sector. It comprises over two lakhs factories. Now,
annual accounts of companies filed with the Ministry of Corporate Affairs has
been used. This is said to include around five lakh companies, bringing in more
companies from the unlisted and informal sectors.
2. Under the old method, GDP was calculated at factor cost; now it will be done at
basic prices. For arriving at the new gross value added (GVA) at basic prices,
production taxes, such as property tax, are added and subsidies are subtracted from
GDP at factor cost.
3. Growth in the economy under the old series was gauged by the growth in GDP
at factor cost. Under the new series, it is based on GDP at constant market price.
To arrive at GDP at market price, indirect taxes are added while subsidies are
subtracted from GVA at basic price.
Now GDP at factor cost will no longer be discussed; instead, industry-wise
estimates will be presented as gross value added (GVA) at basic prices while GDP
at market prices will be referred to as GDP and it will be equal to GVA at basic
prices plus production taxes minus subsidies.
While the new GDP shows 9.3 per cent growth in manufacturing in recent quarter,
the actual performance of NSE-listed companies in the manufacturing space shows
that earnings have been declining in the last two years. Inclusion of more
companies from 2 lakhs to 4 lakhs might be the reason behind higher GDP
numbers.
ROLE OF DEFLATOR
India uses two measures, WPI (wholesale price index) and CPI (consumer price
index) to factor in its deflator.In the past, both indexes have fluctuated together, so
there was minimal impact on arriving at an accurate measure of real growth.
However, there has been a divergence between the CPI and the WPI in recent
times. This is because of fall in the global oil prices and other commodities. The
difference between the WPI and the CPI has reached to as high as 9 percentage
points, and is currently around 5 percentage points.
Services, which account for over 60 per cent of GVA (Gross Value Added), are
not covered in the WPI; yet the WPI is used as deflator for several service
activities such as trade, hotels and restaurant, real estate and transportation. This
has overstated the price decline in the GDP deflator hence inflating the real GDP
growth figures. The blended inflation figure used to deflate the nominal data may
therefore be too low, making real GDP growth come out too high.
DISCREPANCIES ROLE
A peculiar feature of GDP numbers for the March quarter is the sharp rise in the
item called “discrepancies”. These “discrepancies”, at constant prices,
were Rs.1.43 trillion in the March 2016 quarter, while they amounted to Rs.29933
crores in the March 2015 quarter. Growth in “discrepancies” contributed 51% of
the growth in GDP in the March quarter. So this might be one reason for increase
in GDP in the March quarter. But Discrepancies don’t represent an actual part of
the economy. They are inserted just to make an accounting relationship hold true.
If India collected better data on expenditure, discrepancies would be closer to zero.
The country’s statisticians first calculate GDP from the production side, with GVA
and taxes and subsidies. They then compute another GDP estimate by adding up
various kinds of spending, from personal consumption to business and government
investment. But because timely, reliable spending data aren’t available in India, the
two GDP estimates don’t usually match. The difference between them is what’s
labeled “discrepancies.” And this amount, whether positive or negative, gets added
to the expenditure-based estimate in the reported data so that the two estimates
come out. So it might not be true to say that the magnitude of discrepancies is
causing GDP growth to be overstated
GOVERNMENT SUBSIDIES
India calculates its GDP by first adding up production in all sectors, from farming
to manufacturing to services, to get a number called gross value added, or GVA.
But then, because the amount consumers actually spend on goods and services is
affected by taxes and government subsidies, these get added and subtracted,
respectively, to GVA to yield GDP. Hence, when taxes go up or subsidies go
down, GDP can increase even if GVA decreases or stays flat.
A fall in subsidies and rise in indirect tax collection might be the reason increase in
GDP in March quarter. Subsidy reduction causes production-side GDP to jump,
without correspondingly affecting expenditure-side GDP. The natural result would
be higher discrepancies and higher GDP figures.
CONCLUSION
The global slowdown is likely to persist in the next fiscal too and we can’t expect
that the GDP growth would be very high as compared to previous ones. We can
only hope for a good Monsoon. The growth would be restricted or impinge due to
timid external demand and restricted, slow investment recovery and weak revival
of private investment.
Increase in GDP means growth of the economy and we expect increase in
purchasing power of the people. But nothing of such sort is happening. One of the
major factors that benefited the Modi government in the past year was the crash in
oil prices, which helped lessen the burden on import bill and the inflation. But,
except this, there has not been any marked improvement in the growth triggers in
the domestic market regardless of what the GDP number shows.
This is probably the reason that prompted Rajan to question the new methodology
to calculate the GDP numbers. Clearly, it is time for the Government to pay
attention to the 'skeptics' and look at the economy in a more realistic manner.
Recently a US Congress report was also unable to digest such high figures amidst
these economic conditions. Fudging the data will only cause illusion and the
bubble may burst sooner or later. Global investors use GDP numbers to allocate
their investment allocations between countries. Indicators such as the fiscal deficit
are measured as a ratio of GDP too. So the GDP has its important. Hence the
government must try to explain the calculations of GDP as proficiently as possible.
It should make the GDP figures reliable so that people can have trust on it.
Although the new method is in line with the internationally accepted principles, its
credibility can’t be assured.
GDP measures income, but not equality, it measures growth, but not destruction,
and it ignores values like social cohesion and the environment. So with 7.9 GDP
we can’t guarantee that we are actually growing.
The government should try to work on the ground levels. Should work on
eradicating poverty. Let the discrepancy be what it is. Let the GDP be low or high.
These all things are secondary. If the people are employed, factories are working to
their capacity, demands of the goods is matching with the supply, banks are
providing loans, growth and investment level is increasing, then things like GDP
and discrepancies should not bother much.
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