Handle with care: India's latest GDP numbers flatter but don't deceive

Even if no statistical jugglery is afoot, the "noise" in India's GDP numbers should be eliminated in order to hear the underlying music without distortion, writes T N Ninan

India’s latest GDP (gross domestic product) numbers flatter, though they don’t deceive — because the underlying story is a good one. The flow of quarterly GDP numbers should probably come with a warning: Fragile, handle with care! To understand why, consider the latest set of numbers, which deliver GDP growth of 7.6 per cent for the July-September quarter. And pick the sectoral number that principally supports that upbeat total: Manufacturing sector growth of 13.9 per cent over a year earlier, unusual in itself and well above the growth rates for other sectors.

It so happens that the corresponding quarter a year earlier had (again, unusually) seen the manufacturing sector shrink by 3.8 per cent, thereby creating a low base as the comparison point for this year. Combine the numbers for the latest quarter and the corresponding number a year earlier and you get (13.9 – 3.8 =) 10.1 per cent growth, or an average of 5 per cent for each of those quarters. Taking the liberty of journalistic shorthand, if the 13.9 per cent figure were thus “normalised” to 5 per cent, GDP growth in the latest quarter would drop from 7.6 per cent to about 6 per cent (and the figure for the corresponding quarter last year would go up). So the first warning when looking at GDP numbers should be: Watch out for the outlier sectors.

There are other issues with measuring the manufacturing sector, but space does not permit their exploration. Meanwhile, the GDP construct is littered with other smaller bombs, like the way inflation numbers are used to deduce real growth (at constant prices) from nominal growth (at current prices). The underlying statistical base for some other numbers used is also shaky, like for the large unorganised sector. The way changes in the prices of imported goods (like oil) are used to arrive at GDP has yet other distorting effects. For the current quarter, they too have served to portray overall growth in a flattering light. Suffice it to say that decoding India’s official GDP numbers has become a cottage industry for economists and statisticians.

That is not to say that statistical jugglery is afoot, only to warn that the “noise” in the numbers should be eliminated in order to hear the underlying music, without distortion. Covid on its part has complicated matters by contributing its own statistical blips. Last year’s 7.2 per cent growth, for instance, benefited from the first half’s boost on account of recovery from the Covid downturn. Such pandemic-induced blips may finally be behind us, but the longer-term problems with India’s statistical system and data base remain.

These work both ways. If one particular period’s numbers are exaggerated, another period’s numbers would have been understated. So while GDP growth of 7.2 per cent last year and 7.7 per cent in the first half of this year are great, the underlying reality is a more modest one, and the coming quarters are likely to report closer to 6 per cent growth. That last figure may be closer to India’s long-term sustainable growth rate; somewhat more if you are an optimist, less if you are a statistical sceptic.

The reason for optimism is that private investment is yet to kick in to the full extent of the economy’s potential. The reason for scepticism lies in the fact that while even the GDP numbers as reported show below-par growth in private consumption, even that has been fuelled by a boom in personal loans, which cannot last. Consumers who have stoked up on debt will be spending subsequent quarters paying down that debt, not indulging in further consumption. Sustained lack of pace in consumption growth would act as a drag on GDP numbers, and inhibit investment.

None of this takes away from the fact that, in terms of economic growth, the Indian economy is a good news story. It is growing at more than twice the speed of the global economy, and doing better than any other large economy. And so, quarter by quarter, like a sustained drip, the story has registered here and abroad that India’s could be the economy of the decade.