Updated: March 8, 2021 9:35:36 am
Imagine driving a car whose speedometer cannot tell the current speed but only relative to what it was four hours ago. Apart from the comical encounters with police when stopped for speeding and the predicament in defining a “speed limit”, there is a more fundamental problem it would create. The driver will not know whether the car is accelerating or decelerating and, therefore, whether to press the accelerator or the brake. This is a central weakness of India’s GDP statistics, exemplified by last week’s 4Q20 print.
The CSO press release stated that India grew 0.4 per cent on a year-ago basis, that is, relative to the level of GDP four quarters before. Many heaved a sigh of relief at growth turning positive after two quarters of negative year-ago prints (-24.4 per cent in 2Q20 and -7.3 per cent in 3Q20) and declared that growth would accelerate from hereon as mobility increased and the fiscal policy support started to bite.
Nothing could be further from the truth. To know whether the economy will accelerate or decelerate, one needs to know its current speed. Not what it is relative to a year ago. To do that, one needs to compute the quarter-on-quarter growth as almost all large economies do. These computations are not easy, because each quarter has its own characteristics or, as economists call it, “seasonality”, which naturally increases or decreases activity in that period. Think of quarters with festivals or with harvests versus those without them. The modern economy is more complicated as its seasonal patterns change when its structure does. To compare apples with apples, these changes to seasonality need to be excluded from the data.
The good news is that statisticians have been working on this issue for more than a century and, over the last two decades, many official statistical bodies (such as the US Census Bureau) have made deseasonalising methods freely available. Even the most rudimentary statistical package in the market today includes a wide variety of such techniques already built in.
J.P. Morgan uses one such deseasonalising technique (the US Census Bureau’s X12 method for the more technically minded reader). The derived quarterly path is the following: In 1Q20, India’s economy grew 3.7 per cent over the previous quarter, in 2Q20 the economy contracted 25 per cent and then recovered 21.5 per cent in 3Q20 and ended the last quarter at 5.7 per cent. Put differently, growth slowed to 5.7 per cent last quarter — the latest reading of the economy’s “current” speed.
So, India’s recovery narrative is very different when measured by its current speed versus that of the speed relative to what happened a year ago. It isn’t that the economy contracted over 2Q-3Q and then recovered in 4Q. Instead, the economy had posted its strongest pace in 3Q and slowed since then.
Before one brushes all this aside as just semantics, consider the following exercise. If the level of 1Q20 GDP is set at 100, then the quarterly growth rates imply that it fell to 75, rising to 91.1 in the following quarter and then to 96.3 last quarter. Now assume that the level of GDP remains constant for the next five quarters, that is, there is no growth in the economy until the end of fiscal year 2021-22. This would mechanically put the full year growth in 2021-22 at 7.2 per cent simply because of the low average level of GDP in the previous year. If the speed of the economy were to remain at its current pace of 5.7 per cent, then the annual growth in 2021-22 would be an astonishing 28.7 per cent. Any annual growth projection for next year that is less than this necessarily implies a slowdown from the current pace. It’s just arithmetic. Nothing to do with economics, policies, or reforms.
The budget documents suggest that the government’s projected nominal growth for 2021-22 is 14.5 per cent. This implies a real growth rate of around 11 per cent assuming inflation averages 3.5 per cent. The implied average quarterly pace, consistent with an 11 per cent annual growth, is just 1 per cent. Substantially slower than the current rate of 5.7 per cent. Not faster! However, the year-on-year quarterly numbers will keep rising giving the false assurance of a strengthening recovery when in reality the level of income would rise only at a grinding pace.
I am not sure that the government is aware that underlying its annual growth projection is such a drastic implied slowdown in the pace of the recovery. J.P. Morgan, however, is more optimistic. The pace of growth is forecast to decelerate to an average of 1.6 per cent, higher than the pre-pandemic quarterly pace of 1 per cent, delivering an annual growth rate of 13.5 per cent.
The reasons behind the deceleration are that India’s growth drivers had already slowed dramatically prior to the pandemic. The pandemic likely exacerbated them and, importantly, has created new and widening imbalances. With listed companies posting strong profit growth in 3Q and 4Q, much of the decline in overall income has fallen on households and MSMEs. This is likely to have not only worsened income inequality, but also severely impaired their balance sheets, making it that much more difficult to access credit in the coming quarters. While industry has recovered to 98 per cent of its pre-pandemic level, the service sector remains substantially below. Thus, much of the continued high unemployment (as reported by private surveys) is in services. This is likely to have disproportionately increased women’s unemployment, thereby widening the gender gap. Last quarter, central government spending rose 12 per cent, but overall public expenditure contracted 1 per cent, implying a sharp contraction at the state level.
Neither fiscal policy (headlined by a 0.2 per cent of GDP higher infrastructure spending and financed by privatisation) nor monetary policy (now struggling to balance keeping inflation low, growth high, exchange rate stable, and bond yields contained) are designed to reverse these widening economic imbalances. This makes it hard to see India’s growth engines firing on all cylinders, despite the rollout of vaccines and the anticipated surge in US growth.
The writer is Chief Emerging Markets Economist, J.P. Morgan.
This article first appeared in the print edition on March 8, 2021 under the title ‘A slower recovery’. Views expressed are personal