The primary purpose of statistics relating to growth or inflation is to provide insights into the state of the economy that are useful to the policymaker as well as the lay public. Such information should also conform to reality, based on broad perception as well as other data sources. The Central Statistical Office’s (CSO’s) estimates of GDP growth, based on a revised computation methodology, fail the reliability test on all counts. The 7.4 per cent projection for 2014-15 is difficult to reconcile with IIP numbers (2.2 per cent year-on-year increase during April-November), excise revenue collections (0.2 per cent growth in April-December), no signs of an investment revival and a poor year for agriculture. The evidence for the last two is there in the CSO data itself: gross fixed capital formation and agriculture, forestry and fishing are expected to grow only 4.1 and 1.1 per cent, respectively, this fiscal.
Then where is the 7.4 per cent growth — on top of the 6.9 per cent in 2013-14 — coming from? Clearly, this shouldn’t have anything to do with the new GDP estimates supposedly being based on “value-addition” rather than “production”.
The GDP was, in fact, always computed on the basis of gross value-added. There has been no fundamental shift in this methodology, where one takes the value of each sector’s output after deducting for the inputs. True, IIP data looks only at “output”, not “value-added”. Theoretically speaking, it is possible for firms to generate more value-added from the same level of input; it may come from improved efficiencies. But that still cannot explain IIP-based manufacturing growth at a mere 1.1 per cent during April-November, against 6.8 per cent in the case of manufacturing value-added for the entire fiscal. The CSO needs to shed light on how efficiencies in the country’s manufacturing sector have dramatically gone up in both 2013-14 and 2014-15 to result in much better than expected GDP growth rates.
The CSO may have a case that the new GDP series has a more comprehensive coverage of the corporate sector or even local government institutions. But these should only impact the level of output across all years, not growth per se. The present growth estimates, which give the impression of an economy chugging along merrily, make it confusing for policymaking. The RBI, for one, may see in 7.4 per cent growth signs of an over-heated, rather than slowing, economy.