New numbers

Many implications of revised GDP growth

Last Friday, the ministry of statistics and programme implementation published a new series of national accounts data, built on 2011-12 as the base year for the series. Until now, the base year was 2004-05. Changing the base year every few years is a routine process for national statistical systems. This is absolutely necessary to be able to capture the evolving structure of the economy, as well as bring in newer and more accurate methods of measuring economic activity across a variety of sectors. In the past, when this change was made, the new data typically did not raise serious questions about whether the statistical framework was accurately reflecting the state of the economy, good or bad. This time, however, the differences between the old and the new series are quite significant. In the previous series, India's gross domestic product, or GDP, was estimated to have grown by 4.5 per cent in 2012-13 and a slightly better 4.7 per cent in 2013-14. The run rate for the current year is about 5.5 per cent. In contrast, the new series estimates growth to have been 4.9 per cent in 2012-13, not too different, but a hugely faster 6.6 per cent in 2013-14. The new numbers for 2014-15 will be published on February 9, but the expectation certainly now is that the number will be even higher, perhaps in excess of seven per cent.

The new figures suggest India's recovery began earlier and is much stronger than was earlier believed. From the monetary policy perspective, this raises the question of what the economy's potential rate of growth is - that is, the rate above which demand-side inflationary pressures manifest. Many analysts assessed this to be around 6.5 per cent, perhaps seven per cent on the optimistic side. The new data require a re-assessment of this parameter, without which the room for the Reserve Bank of India to reduce interest rates further could be far less than earlier believed. On the other hand, as regards the fiscal position, the denominator in the deficit-GDP ratio will now be significantly larger, giving the government some welcome fiscal space, which will hopefully be used to increase much-needed capital expenditure. In short, the new numbers are going to be somewhat disruptive of ongoing policy calculations both in Mumbai and New Delhi.

Of course, a substantial assessment of the true state of the economy will have to wait until the back series of GDP numbers with the new base is published, which will hopefully be soon. However, even for the three-year period for which the numbers were published, some concerns need to be addressed. A major reason why the growth rate is so much higher in 2013-14 is that manufacturing is estimated to have grown by a respectable 5.3 per cent year-on-year, compared with a decline of 0.7 per cent under the old series. This certainly does not square with other indicators, like corporate profitability and bank credit growth. Explanations need to be provided. On the positive side, the ministry has announced that it will henceforth follow international practices and report GDP in terms of market prices, reflecting the demand components - consumption, investment, government expenditure and trade - an entirely welcome step.