Fresh salvo at GDP for not capturing ground manufacturing activities

While most criticisms of the data related to GDP are on overestimating economic activities on ground, the latest one in fact censures it for underestimating the manufacturing sector in recent times

Controversy over the quality of data in the new Gross Domestic Product (GDP) series keeps resurfacing again and again ever since it was launched in 2015 with the base year of 2011-2012 and a different methodology than used till the 2004-05 series.

While most criticisms of the data related to GDP are on overestimating economic activities on the ground, the latest one in fact censures it for underestimating the manufacturing sector in recent times.

"We strongly believe that the estimation of manufacturing sector growth needs serious introspection in the sense that IIP (the index of industrial production) is still indexed at 2012 base. Take the example of manufacturing exports. Till pre-pandemic, the IIP and manufacturing exports have moved in close tandem, but they have completely diverged post-pandemic," SBI group chief economic advisor Soumya Kanti Ghosh said.

He attributed this to the government announcing a lot of incentives under the production-linked incentive (PLI) scheme.

He says there has been an exponential jump in manufacturing exports from India, like handset exports that are not a part of the IIP basket, for example, Foxconn.

"Separately, the steel production by select companies has undergone locational shift which is not a part of the IIP sample. Nokia’s handset manufacturing facility in Chennai closed down post-2014. There are many such examples. This has meant that the correlation between manufacturing exports and IIP growth post-pandemic is weak," Ghosh said.

A logical corollary to all this is gross misappropriation (or underestimation) of manufacturing sector growth, he said, adding, "We believe that the new base of IIP (on which the Government is currently working) will remove these glitches to have a fair representation."

However, there are not many takers for this theory.

When asked whether GDP is not able to capture exports through PLI since it was not adequately represented in IIP, former chief statistician Pronab Sen said it was unlikely.

"PLI is mainly for corporates.  A large number of those are listed and their figures are taken from stock exchanges in GDP. The IIP provides data for non-corporate manufacturing," Sen said.

As to the new units, which are coming up and not captured by IIP, Sen said this problem would be there in the index even if it is revised again. New units will keep adding but you will get data from the same number as IIP is an index.

However, what can be done is to use multipliers to capture new units, which could be used while converting IIP into GDP, he said.

Bank of Baroda Chief Economist Madan Sabnavis said, “my understanding is different (from Ghosh's). When we look at GVA across sectors the criteria used are financial results of companies where VA (value addition) is calculated and for the unorganised sector, the IIP is used with price indices. Hence it is quite complete".

“Also, PLI had set a target post-2021 and hence the impact cannot be felt right now”, he added. "If I am not mistaken, sales targets had to be met in three years’ time," Sabnvais said.

Now when exports of manufactured goods are looked at, it will come in when GDP is looked at from the expenditure side where consumption, investment, government expenditure and exports minus imports are used.

"If our exports data is capturing this part of handsets, which I think it is based on the product-wise exports tables, then it is definitely not missed out," he said.

He reminded us that GDP is equal to gross value added (GVA) plus net taxes. "Therefore this truism will hold when we look at it from the GVA side and add taxes and look at GDP from the expenditure side," he explained.

Exports are a part of the manufacturing sector output and are not exclusive conceptually. "When we say that before the pandemic both moved together then it means that as manufacturing grew it was supported by exports as well as domestic (activities)," Sabnavis explained.

To be fair to the criticism of GDP or GVA data, the link between manufacturing in IIP and GVA was quite weak in the first quarter of 2022-23. While manufacturing in IIP grew 12.7 per cent, it rose only 4.8 per cent in GVA.

However, the link was weak in the second, third and fourth quarters of 2020-21, the year when the first wave of Covid-19 struck. At that time IIP, manufacturing grew at less pace than manufacturing in GVA, probably because the unorganised sector was beaten by the severe lockdowns.

Now, IIP, manufacturing grew more rapidly than GVA, manufacturing which could be due to a recovery in the organised sector compared to a year ago.