Don't rush to judgement

Premature to draw policy implications from GDP numbers

Did the Indian economy enter a potentially prolonged slowdown in 2011-12? That's what was indicated by the gross domestic product (GDP) numbers and virtually everybody saw the aggregate picture as being largely consistent with his particular business of livelihood patterns. Then, on January 30, there was a new and improved set of GDP estimates. Growth in 2012-13 was estimated to be significantly higher - 6.6 per cent versus 4.9 per cent, going by the GDP at factor cost measure, which has now been re-designated gross value added (GVA) at basic prices. This, of course, raised several questions - and provoked a guessing game on what the advance estimates for 2014-15 would say about the state of the economy. These numbers were published as scheduled on Monday. At one level, they confirmed what many observers expected to see; the economy was on a recovery path in 2014-15, with the growth rate likely to be higher than in the previous year. Under the old series, projections had tended to cluster around 5.5 per cent. However, the new series sets a rather high bar, which, as it turned out, was cleared. Real GVA at basic prices is estimated to have grown by 7.5 per cent this year. The new benchmark, real GDP at market prices (henceforth just GDP), grew by just a notch lower, 7.4 per cent.

This rate of growth has a number of implications. First, as already indicated, it suggests that the economy is recovering quite nicely, albeit from a slump that was much more moderate than earlier believed. Second, with real growth at 7.4 per cent, nominal growth, which accounts for inflation, is estimated to be 12.8 per cent. This will impact the denominator in two key ratios - the fiscal deficit and the current account deficit. The latter in any case has subsided as a threat this year. The former, however, is a matter of much concern. For advocates of enhanced public spending on infrastructure, more fiscal space would have been good news, but the new numbers show the current year's nominal GDP size to be a little lower than the Budget had projected, making the task of achieving the fiscal deficit target for the current year a little more difficult. Third, the Reserve Bank of India may see this new number as reflecting a higher level of capacity utilisation in the economy than earlier believed, implying that demand-side inflationary pressures are closer at hand. This will weaken its incentives to reduce interest rates further. So at the end of it all, was the despair and hand-wringing about the slowdown just a case of much ado about nothing?

The critical information that is needed to make sense of the new numbers is a longer time series. It is only after capturing an entire business cycle with the new series that analysts will be able to gauge where the economy is positioned in its business cycle. If 2014-15 shows a growth rate of 7.4 per cent, whether this means that the economy is on a crest, in a trough or somewhere in between can only be known for sure when the estimates for, say, the period 2001-11 are also made available. Without this, it would be premature to draw any policy implications from these numbers. All that can be said is that the economy is recovering.