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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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