The revision in data of any economic variable is necessary as the entire product and services baskets keep changing over time for an emerging economy. Therefore, the base years need to be revisited periodically and shifting the same to 2011-12 for GDP appears pragmatic. Aligning the concept to the globally accepted practice of reckoning the variable at market prices makes sense for comparison.
That said, the new series introduced by the ministry of statistics will take time to be absorbed as it has brought out a plethora of data to the table, leaving behind several questions in the minds of the readers. To begin with, the choice of the base year hangs in suspension as usually all base years are considered to be normal years. Here, the choice looked appropriate given that this year was the first one from whence there was a sharp decline in growth based on the old series. But the data put forth now, which starts really from FY13 and FY14, are so different that this premise can be questioned and we will never know whether this was the right choice.
The problem begins with the GDP growth rates under the new concept coming in at 5.1% and 6.9%, respectively, in FY13 and FY14, compared with 4.5% and 4.7% (at factor cost) under the old series. Normally, when base years change, there is always a change in growth rates, but we have never seen a turnaround in judgements due to a change in concept. The first strike is one of embarrassment, as whatever negative was spoken about the earlier political regime with euphemisms of a non-functional government with policy angina are cast aside as the economy was actually very dynamic and there was a V-shaped recovery in FY14 compared with stagnation which was a conclusion drawn from the old series data for FY14.
In fact, given the changes in the concept where we include net product taxes, one could look at just gross value added (GVA). Growth in GVA still comes to 4.9% and 6.6%, respectively, which means that taxes per se are not the reason for this difference and the economy was really growing. Or rather the new coverage has grown sharply. What, then, can account for this big change in GDP?
The sector-wise growth in GVA shows that everything that economist and analysts were saying was incorrect. Mining now has grown by 5.4% against minus 1.4% in the old series, manufacturing by 5.3 perfect as against minus 0.7%, and trade, repair and hotels by 13.3% against 1% earlier. These numbers are radical changes in the structure now presented. If these numbers reflect better coverage and are hence are more exhaustive, then we were wrong in saying that the mining irregularity affected growth and that industry was buffeted by absence of policy movement.
At the theoretical level, there are two questions. First, as the sizes of GDP at current prices under the old and new series are almost identical for 2013-14, it is hard to believe that when converted to real terms (both the concepts are at market prices), growth can increase sharply. The implication is that the real economy suddenly became buoyant with better coverage and reporting. Curiously, in this concept, if GVA grows by a stable number but net taxes rise sharply due to higher taxes or lower subsidies, then the GDP number will increase by a higher level.
This leads to the second question, which is that in this scenario it means that inflation actually came down as with 6.9% growth in real GDP and 13.6% in nominal GDP, inflation was 6.7% against 8% in 2012-13 (13.1% nominal GDP and 5.1% real GDP). Were we then off-track on monetary policy even though arguably these inflation numbers are closer to the GDP deflator rather than the CPI numbers?
At the operational level, the ministry’s paper on GDP revision does not give the same for various sectors and stops at the GVA level only. This will make it hard to forecast GDP as the net product taxes for various sectors have not been provided.
The ministry has loaded the statement with too much of data that it does become challenging to put them together. Much like what RBI has done for balance of payments, where the data is presented in both the new and old formats separately, the same should have been done here. This holds especially as the new series has a very different basket of goods and services, which, prima facie, looks hard to digest. Has our consumption basket changed radically or is it just that better reporting is taking place? If it is the latter which is what it appears to be then to maintain comparability we need to see how the earlier series would move with the old composition but new concept at market prices. Curiously, when the old series is looked at FY05 base year but at market prices, then the two growth numbers for GDP are 4.7 and 5% (as per the May 2014 press release). The new numbers are still way higher at 5.1 and 6.9%.
These numbers do not quite give comfort as they could be revised later and we could get different numbers. It would also be unwise to talk on the state of economy right now as all the analysis and judgements we have passed until January 29 based on the old series could be overturned when we get in the new core sector data, IIP and GDP numbers under the new criteria. It is also hard to reconcile this buoyant 6.9% number with the gloom in industry which includes the entire corporate space and SME segment which is still looking to see the economy recover. Further, it is hard to reconcile high real GDP growth with declining capital formation in both real and current prices. In fact, growth in government expenditure has been higher in both real and current terms which are the brightest spots in FY14. And to think that we said that the government is not spending by sticking to FRBM, now sounds incongruous.
That said, the new series introduced by the ministry of statistics will take time to be absorbed as it has brought out a plethora of data to the table, leaving behind several questions in the minds of the readers. To begin with, the choice of the base year hangs in suspension as usually all base years are considered to be normal years. Here, the choice looked appropriate given that this year was the first one from whence there was a sharp decline in growth based on the old series. But the data put forth now, which starts really from FY13 and FY14, are so different that this premise can be questioned and we will never know whether this was the right choice.
The problem begins with the GDP growth rates under the new concept coming in at 5.1% and 6.9%, respectively, in FY13 and FY14, compared with 4.5% and 4.7% (at factor cost) under the old series. Normally, when base years change, there is always a change in growth rates, but we have never seen a turnaround in judgements due to a change in concept. The first strike is one of embarrassment, as whatever negative was spoken about the earlier political regime with euphemisms of a non-functional government with policy angina are cast aside as the economy was actually very dynamic and there was a V-shaped recovery in FY14 compared with stagnation which was a conclusion drawn from the old series data for FY14.
In fact, given the changes in the concept where we include net product taxes, one could look at just gross value added (GVA). Growth in GVA still comes to 4.9% and 6.6%, respectively, which means that taxes per se are not the reason for this difference and the economy was really growing. Or rather the new coverage has grown sharply. What, then, can account for this big change in GDP?
The sector-wise growth in GVA shows that everything that economist and analysts were saying was incorrect. Mining now has grown by 5.4% against minus 1.4% in the old series, manufacturing by 5.3 perfect as against minus 0.7%, and trade, repair and hotels by 13.3% against 1% earlier. These numbers are radical changes in the structure now presented. If these numbers reflect better coverage and are hence are more exhaustive, then we were wrong in saying that the mining irregularity affected growth and that industry was buffeted by absence of policy movement.
At the theoretical level, there are two questions. First, as the sizes of GDP at current prices under the old and new series are almost identical for 2013-14, it is hard to believe that when converted to real terms (both the concepts are at market prices), growth can increase sharply. The implication is that the real economy suddenly became buoyant with better coverage and reporting. Curiously, in this concept, if GVA grows by a stable number but net taxes rise sharply due to higher taxes or lower subsidies, then the GDP number will increase by a higher level.
This leads to the second question, which is that in this scenario it means that inflation actually came down as with 6.9% growth in real GDP and 13.6% in nominal GDP, inflation was 6.7% against 8% in 2012-13 (13.1% nominal GDP and 5.1% real GDP). Were we then off-track on monetary policy even though arguably these inflation numbers are closer to the GDP deflator rather than the CPI numbers?
At the operational level, the ministry’s paper on GDP revision does not give the same for various sectors and stops at the GVA level only. This will make it hard to forecast GDP as the net product taxes for various sectors have not been provided.
The ministry has loaded the statement with too much of data that it does become challenging to put them together. Much like what RBI has done for balance of payments, where the data is presented in both the new and old formats separately, the same should have been done here. This holds especially as the new series has a very different basket of goods and services, which, prima facie, looks hard to digest. Has our consumption basket changed radically or is it just that better reporting is taking place? If it is the latter which is what it appears to be then to maintain comparability we need to see how the earlier series would move with the old composition but new concept at market prices. Curiously, when the old series is looked at FY05 base year but at market prices, then the two growth numbers for GDP are 4.7 and 5% (as per the May 2014 press release). The new numbers are still way higher at 5.1 and 6.9%.
These numbers do not quite give comfort as they could be revised later and we could get different numbers. It would also be unwise to talk on the state of economy right now as all the analysis and judgements we have passed until January 29 based on the old series could be overturned when we get in the new core sector data, IIP and GDP numbers under the new criteria. It is also hard to reconcile this buoyant 6.9% number with the gloom in industry which includes the entire corporate space and SME segment which is still looking to see the economy recover. Further, it is hard to reconcile high real GDP growth with declining capital formation in both real and current prices. In fact, growth in government expenditure has been higher in both real and current terms which are the brightest spots in FY14. And to think that we said that the government is not spending by sticking to FRBM, now sounds incongruous.
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