GDP back series data: New figures throw up a productivity puzzle

Gross fixed capital formation, which connotes investment in the economy, had touched a high of 35.8 per cent in 2007-08, declining thereafter to 28.5 per cent in 2017-18

The new gross domestic product (GDP) back series released by the central statistics office (CSO) on Wednesday has generated much controversy. 

While much of the discourse has centered on the comparative performance of the economy under the UPA and NDA governments, an equally critical issue is what has happened to productivity over this period. 

Gross fixed capital formation (GFCF), which connotes investment in the economy, had touched a high of 35.8 per cent in 2007-08, declining thereafter to 28.5 per cent in 2017-18. Yet, economic growth has risen over this period. Why? What does this say about productivity over this period? 

One way to examine productivity is to look at trends in the incremental capital-output ratio (ICOR). The ICOR is the amount of capital that is required to produce one unit of output. Lower the ICOR, higher is productivity of capital, as less capital is required to produce an additional unit of output. Put differently higher the ICOR, the less efficient is the usage of capital. 

Now, latest CSO data shows that between 2004-05 and 2013-14, GFCF averaged 33.4 per cent of GDP, touching a high of 35.8 per cent in 2007-08, even as growth averaged around 6.7 per cent. 

In comparison, in the period between 2014-15 and 2017-18, GFCF averaged 28.9 per cent of the GDP. But with growth averaging 7.35 per cent over this period, this implies a fall in ICOR suggesting a rise in productivity during this period. 

“The reducing ICOR in the current years reflects a relative increasing efficiency of capital,” noted Soumya Kanti Ghosh, group chief economic advisor, State Bank of India, in a research note. 

This marks a reversal of the earlier trend in ICOR.

The report of the working group on estimation of investment, its composition and trend for the 12th five-year plan had estimated that the ICOR was been fluctuating within the range of 4-4.5 across all 5-year Plan periods. However, it had declined to 3.7 in the 10th Five-Year Plan (2002-2007). While in the 11th plan period, ICOR had risen, the report advised caution on the estimate as the committee did not have data for all the years under the 11th plan (2007-12). 

“The talk on ICOR becomes relevant especially considering the slowdown in the economy over the past few years and the over-leveraged corporate balance sheets, resulting in burgeoning bad debts in the financial sector,” noted Ghosh. 

However, if capacity utilisation has remained low during this period, as various surveys of the Reserve Bank of India (RBI) have pointed, should this not lead to a higher ICOR? 

As Ghosh notes in the report, “The GDP growth in both the years (FY07 and FY16 is around 8% but the other indicators were quite diverse. It is surprising that in FY07 with 36% investment rate, 28.5% credit growth and 32% CV sales GDP grew by 8.1%. But in FY16, GDP grew by 8.2% with 32.3% investment rate, only 10.9% credit growth and 12% CV sales. Does this mean capital is now more efficient?” 

Part of the change in trends could be due to the way the back series has been computed experts told Business Standard.

On the expenditure side of GDP calculations, data for three components — government final consumption expenditure, exports and imports — should ideally not change much as they are based on relatively hard data. 

So any major revisions are likely to be in private final consumption expenditure and gross fixed capital formation. On both these two indicators, CSO has reportedly used the splicing technique.