Taken at face value, the Indian economy will grow by 7.4 per cent this fiscal, outpacing China to become the world’s fastest growing economy. But a revision in the method of calculation has left analysts and the government’s own chief economic advisor doubting how far the data can be trusted.
Just over a week ago, everyone was working under the assumption that India was still struggling to gather momentum under Prime Minister Narendra Modi’s reform-minded government. Prior to Modi’s election in May, the economy had endured its weakest phase of growth since the mid-1980s.
Then India’s statisticians re-worked the numbers, changing both the way it calculates gross domestic product (GDP) and the base year. Suddenly the economy appeared to be motoring again. Aided by a 7.5 per cent expansion during October-December, Asia’s third-largest economy will see the fastest pace of growth since 2010-11 when it achieved 8.7 per cent.
The GDP growth in 2010-11 was calculated based on factor cost which has now been changed to constant prices to take into account gross value addition in goods and services as well as indirect taxes. Besides, the base year has been shifted to 2011-12 from 2004-05 earlier.
Last month, the statistics ministry had pegged the previous year’s growth at 6.9 per cent as against 4.7 per cent estimated previously, a revision which led to some economists, including RBI Governor Raghuram Rajan, seeking more clarity.
“We do need to spend more time to understanding the GDP numbers,” Rajan had said on February 3 after releasing the bi-monthly monetary policy of the central bank that retained the forecast of 5.5 per cent GDP (based on old method) growth in 2014-15.
“We will be watching the February 9 release with great care and dwell deeply into what we see there. At this point, it is premature to take a strong view based on these GDP numbers,” he had said.
Industry chamber Assocham said the revision was confusing as “investment is yet to revive, consumer demand is not returning with a significant pace despite a sharp reduction in crude oil prices.”
The advance estimates released by the government further said the per capita net national income in 2014-15 is estimated to be Rs 88,538, up 10.1 per cent as compared to Rs 80,388 in 2013-14.
The sectors contributing to the advance estimates include higher manufacturing growth at 6.8 per cent, and most of the services, including financial, real estate, hotels and transport, growing over seven per cent in the fiscal. However, agriculture is pegged at 1.1 per cent, much lower than 3.7 per cent achieved in the last fiscal.
Other indicators such as industrial production and trade suggest the economy is still suffering from slack.
The statistical fog will be a problem for Finance Minister Arun Jaitley as he drafts an annual budget that could be crucial to lifting the economy out of a lengthy rut. Presenting the 2015-16 budget on February 28, Jaitley is widely expected to boost capital spending and offer tax breaks to an under-performing manufacturing sector.
The revised GDP data may make it harder for Jaitley to assess the size of the fiscal stimulus required to help restore the economy to the even higher growth rates needed to generate jobs for millions of young Indians entering the labour force. The government’s chief economic adviser, Arvind Subramanian, has warned against framing policies based on the recent revisions, which he branded “mystifying”. “I am puzzled by the new GDP growth numbers,” he said last week.