Rising inventory a bad news for growth story

India released its Q4 FY13 GDP numbers on May 31 and data have disappointed on the downside. The income-side GDP (GDP at factor cost) clocked an annual growth rate 4.78 per cent, little changed from the upwardly revised 4.71 per cent (from 4.47 per cent) growth recorded in the previous quarter. Given this, it's difficult to say that the economy has indeed bottomed out. In fact, the full year growth rate of 4.99 per cent is the first sub-five per cent growth in a decade.

While the advance estimate of FY13 GDP released in February (and trashed by the government) turned out to be fairly accurate, the data does not give any comfort that the demand destruction that we have been seeing has bottomed out. Domestic demand or Private Final Consumption Expenditure (PFCE) grew at an annual rate of 4.1 per cent, a decadal low. In fact, although manufacturing showed some semblance of recovery during the last quarter of FY13, faltering domestic demand resulted in accumulation of inventory. When one looks at India's expenditure side GDP (GDP at market price) there is a component known as change in stocks/inventory. To understand the effect of inventory on GDP growth, one needs to look at the change in the component 'change in inventory'. When there is inventory accumulation, this change is positive and has a positive impact on the GDP. When there is a drawdown, this change is negative and, hence, negatively impacts the GDP. As the chart shows, all the four quarters of the financial year saw substantial accumulation of inventory.

What this would mean is that if demand levels do not pick up, then India's manufacturing activity might suffer as producers would prefer to draw down on inventories to partially meet demand requirement, rather than manufacture at the same pace. There is also a possibility of the data being revised downward. There are two reasons for that. First, India's expenditure-side GDP grew at 3.2 per cent annual, the lowest since 1991-92. And, the difference between the two different methods of calculation of GDP was as high as 1.8 per cent, the second highest difference in annual growth rates. Second, the figure for statistical discrepancy for FY13 Q4 is inordinately high at Rs 669.23 billion, which is more than four per cent of the Q4 GDP.

The writer is a Delhi-based independent economist