India’s 8% GDP growth estimate is a joke

Big, bigger, biggest.
Big, bigger, biggest.
Image: Reuters/Ajay Verma
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By now, everyone knows that India is growing faster than China, thanks to the revised gross domestic product (GDP) calculations thrown out by Asia’s third largest economy.

In 2016, the government last week said, India’s economy is expected to grow between 8.1% and 8.5%. According to the International Monetary Fund (IMF), China’s GDP is projected to grow (pdf) at 6.3% in 2016.

These high growth numbers are the result of what the Central Statistical Office (CSO), the agency that computes the GDP, industrial growth and consumer price indices among others, did in January. It shifted the reference year for measuring inflation-adjusted growth from 2004-05 to 2011-12. The CSO also included new data sources, classification systems, and items like LED television sets and smartphones to the country’s national accounts. As a result, in 2013-14 the economy grew at 6.9%, rather than 4.7%, the CSO data showed earlier.

These calculations, however have received a lot of criticism. The revised method has been called “puzzling”, “baffling” and “confusing” by not only investors but also by some of India’s top economists—both in the government and outside.

To start with, the country’s own chief economic advisor, Arvind Subramanian, said that the revised estimates are puzzling, on Feb. 27, after releasing the Economic Survey 2014-2015.

But this was not the first time he expressed his confusion.

On Feb. 3 in an interview to the Business Standard newspaper, he said: “I am puzzled by the new GDP growth numbers. The revised numbers show GDP growth rose from 4.7% to 5.1% for 2012-13 and from 5% to 6.9% for 2013-14. This means acceleration in GDP growth of 1.9 percentage points in 2013-14, just by comparing the new numbers across time.”

This is “mystifying,” he added, because “these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy.”

Some experts say the revision is a joke.

Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, wrote in a blog for The Times of India, that the “dramatic upward revision of the GDP growth rate is a bad joke, smashing India’s credibility and making its statistics bureau a laughing stock in global financial circles.”

“Every piece of data—from the tepid increase in corporate revenues to imports, credit, rail freight and auto sales—points to a much lower growth figure, probably closer to the old estimate of 5%,” he added.

Sharma also wrote that this makes India look bad even compared to China, which many analysts have long suspected of massaging GDP figures to show steady growth.

“The GDP revisions are a reminder that India faces some of the same issues with iffy data as China does,” journalist and economist Dhiraj Nayyar wrote last month.

“If India is serious about becoming an economic superpower, it needs to work harder to create a world-class statistical system. Good numbers are welcome. Timely, accurate data is indispensable,” Nayyar explained.

And experts from all across the spectrum agree that the situation on the ground doesn’t quite mirror the growth described by the new estimates. For instance, the stock of stalled projects (pdf) at the end of December 2014 stood at Rs8.8 lakh crore ($141.3 billion), which is 7% of GDP.

Stalled projects and stretched capacity in the power, infrastructure and housing sectors have a knock-on effects down the supply chain to small-and medium-sized enterprises (SMEs), Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small & Medium Enterprises, told Reuters.

“This is a bit perplexing. The feedback we are getting on the ground is not as positive. SMEs are not getting the orders,” Bhardwaj said. ”There is an improvement in business sentiment, in the environment, but unfortunately there is no movement on the ground.”

Even retailers believe the numbers don’t show the correct picture of the business environment in the country.

Govind Shrikhande, managing director of Stoppers Stop, an Indian retailer said the business sentiment is still subdued.

“Is it a trick or a treat?” he told Reuters. “I haven’t understood how they are calculating it, but we are not seeing it reflected in business as yet.”

Reserve Bank of India governor Raghuram Rajan is also far from convinced.

“We find it hard to see the economy as rollicking in 2013-14,” Rajan said in early February. “It’s premature to take a strong view based on these GDP numbers.”

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