The decline of the concept of GDP Business Line 28th May 2018

GDP number rarely reflects the true picture in any sector and the discrepancy can be significant

The GDP growth rate is probably the most commonly used variable to denote the state of the economy. A higher rate is often taken as being a vindication of the success of any regime. While it does have theoretical limitations — such as exclusion of, say, the services of housewives which are not valued or illicit activities like gambling and prostitution, which actually generate income and spending power — it has turned out to be a less than satisfactory indicator of general state of affairs.

This has been observed to be true, especially after the new methodology of calculating GDP was brought in when it was valued at market prices. While this approach appears to be comparable to concepts used by multilateral agencies, there is not much conviction when we say that GDP growth is on the recovery path at, say, 6.6 per cent or 7 per cent. Where are the anomalies?

A fundamental challenge when calculating GDP is that it is based on the use of several proxies and imputations which change regularly as they come out with various lags. For example, there is no official monthly statistics on livestock and other allied activities, which comprise around 40 per cent of agriculture activity.

IIP is used for the unorganised manufacturing sector while corporate results are used for the organised part, which is around 70 per cent of output. Clearly, there is a schism in the data which is used. The same holds for hotels and real estate where corporate results are used.

While we are presently in the month of May all corporate results are still not out, while the annual data on GDP is to come out on 31st. There will hence be several imprecise imputations. To add to the confusion, for some reason the CSO brings out the first advance estimates which are based on extrapolating the first six months’ data, which may sound bizarre. But these numbers nevertheless generate a lot of discussion.

State of the economy

Now let us try and look at the state of the economy and link it with the GDP growth rate. The last advance estimate put growth at 6.6 per cent for the year which has been considered to be good even though it came well below the 8 per cent and 7.1 per cent registered in the previous two years. But does this headline number tell the real story?

First, agriculture should be doing well with a good monsoon. But farmer distress is visible in several pockets and the sugar episode is probably the bitterest one. Farmers have confronted declining prices during the year for pulses in particular due to overproduction, which has impacted their income.

The government has kept this in mind when arguing for higher MSP (minimum support price) for the 2018 kharif season. Therefore, the so-called rural story of spending after a good harvest post a good monsoon has not quite played out.

Manufacturing has been a disappointment for another year, with growth at just 4.5 per cent compared over 4.4 per cent in FY17. The economy was used to seeing growth rates of between 8-10 per cent in the post financial crisis years and hence this continued stagnation is not good news.

Both consumer and capital goods have underperformed in the last two years. The corporate results too suggest that growth is fairly stagnant at 8 per cent for sales, which is not reflective of buoyancy. Third, investment has stagnated for the third successive year and the high rate of 34.3 per cent in 2011-12 looks like a song from the past. Low capacity utilisation levels in industry and absence of interest in investment in infrastructure characterise a rather anaemic sector.

Fourth, while there is no clear data on jobs created, the general impression is that the pace of employment creation has slowed down. Corporates are not recruiting and are downsizing to control expenses and the government bodies are not replacing the lower levels of staff.

The services sector has been affected by a trough in construction sector for unskilled labour and uncertainty in the skilled IT sector. This is one reason why spending has not increased to boost industrial growth.

Fifth, the transport sector is supposed to be doing well as the sales tax proxy or GST is being used. But the GST data show abundant volatility and could be disguising the true picture.

Bank sector in a mess

Sixth, the banking sector is supposed to be growing at a healthy rate as it is a combination of deposits and credit growth, which by the end of the year has averaged 8-9 per cent. But this would be contrary to the grim picture at the bank level where both PSBs (public sector banks) and private banks are going through tough times.

Losses have eroded the net worth of some banks and the growing NPAs (non-performing assets) have cast a shadow on capital availability for future lending. Also, with several banks being put under PCA (prompt corrective action), prospects of this sector have come down sharply. Yet, the imputed growth in GDP does not reflect this pain point.

Seventh the real estate segment is typified by performance of companies in this sector which captures a very small part of the largely unorganised sector. Given that the sector is still going through a metamorphosis post RERA, the value-added numbers emanating from this sector does not seem to be in consonance with the reality.

Last, the public administration sector, which is the fastest growing one, is based on Central government spending, which again does not reveal the stress on attaining the fiscal deficit target for the year or the severe compromise made on capex of at least ₹30,000 crore in FY18. Also, some States are heavily stressed with the UDAY debt and are having trouble meeting the FRBM norms.

The point really is that the GDP number rarely reflects the true picture in any sector and the discrepancy can be significant. Hence the concept can just be a number that is widely used because of the absence of alternatives.