GDP numbers show why all is not well with the economy

As significant portion of GDP growth is caused by increased subsidies, the impression that things are worse is a fact

 

For some time now, many of us have had the impression that things are not exactly the way they seem. While we can see that GDP growth is much lower now, we continue to get a nagging feeling that things may actually be worse. If one looks at the GDP data a bit closer, the answers are apparent.

India is one of the few countries that measures real (constant prices) GDP growth at factor cost as opposed to market prices. This is one of the reasons why IMF forecasts (which are made on the basis of market prices to maintain consistency with other nations) are often very different from that of our government and other agencies. The difference between the two is indirect taxes and subsidies. The formula is simple.

GDP at factor cost + indirect taxes - subsidies = GDP at market prices

If both indirect taxes and subsidies remain at a steady proportion to GDP, the gap between the growth rate of the two GDP parameters is small. However, this is not always the case. While indirect tax collections typically grow every year, they have remained in a broad range over the years. Ignoring the impact of indirect taxes sharpens focus on the impact of subsidies on GDP growth characteristics.

For example, in response to the Global Financial Crisis, our government introduced emergency measures that sent subsidies soaring in the last two quarters of 2008 - 2009. In these two quarters, headline GDP growth over the same quarter of the previous year was 5.77% and 3.46%. However, net of subsidies, growth was 2.60% and 2.07%. For the full year, headline GDP growth was 6.72% while net of subsidies, it was just 5.20%. This is typical of such an environment when the private sector is not really participating in growth, or being crowded out.

The situation was reversed in the last two quarters of 2009 - 2010, when subsides fell when compared to the emergency levels of the same quarters in the earlier year. Headline GDP growth for the last two quarters was 7.67% and 11.37% while adjusted for subsidies, the growth was 9.91% and 13.62%. For the full year, headline growth was 8.59% while net of subsidies, it was 9.80%

Apart from this episode of emergency measures, subsidies, as a portion of GDP, have remained in a broad range over the years. However, this has changed over the last few quarters. An obvious indicator of this change, is that since the beginning of the last financial year, headline GDP growth has been far higher than growth net of subsidies.

In effect, stripped of government subsidies, growth in India is at the lowest level on record (subsidies data as a separate line item is available only from 1993 - 1994). Also, of the already depressed headline growth rate, an unprecedented portion is contributed by subsidies.

As a point of reference, even with the emergency measures in 2008 - 2009, growth in subsidies accounted for just over 25% of growth in GDP. Excluding 2008 - 2009, 2009 - 2010 and the last few quarters, the average from 1993 - 94 is just 3.90%.

This story has continued in the first quarter of this financial year as well. Headline growth was 4.35% while growth net of subsidies is 2.27%. Increased subsidies account for more than 50% of increase in GDP. Data for the second quarter is due to be released in a couple of days and all indications point towards a further continuation of the trend.

So, given the fact that a significant portion of GDP growth is caused by increased subsidies, the impression that things are worse than they seem is not just a feeling. Its a fact.

Period	Headline Growth (%)	Growth net of subsidies
FY 13 Q1	5.35%	3.50%
FY 13 Q2	5.19%	2.18%
FY 13 Q3	4.71%	3.76%
FY 13 Q4	4.78%	2.08%
FY 13 total	4.99%	2.88%
Growth over same quarter of previous year   Source: Ministry of Statistics & Programme Implementation,   author's calculations

Period	Increase in GDP (Rs. Crs.)	Increase in subsidies (Rs. Crs.)	%
FY 13 Q1	66,758.79	24,715.42	37.02%
FY 13 Q2	64,424.66	38,623.90	59.95%
FY 13 Q3	63,616.53	14,674.39	23.07%
FY 13 Q4	67,055.13	39,165.56	58.41%
FY 13 total	261,855.09	117,179.28	44.75%
Growth over same quarter of previous year   Source: Ministry of Statistics & Programme Implementation, author's calculations

The author is an economist and Director & Business Head - Portfolio Management Services at Pramerica Asset Managers Pvt. Ltd. The views expressed are personal.