Doubts over GDP

My article in Dharitri

http://www.dharitri.com/Bhubaneswar/120615/p6.htm

GDP Numbers – Little Truth, More Lies

Bimal Prasad Pandia

The Central Government, which has currently unleashed a publicity overdrive to showcase success of its first year in office, is highlighting a substantial increase in the Gross Domestic Product (GDP) of the country as one its important achievement. With a bunch of statistics, the government conveys that India’s GDP grew at a rate of 7.5% in the quarter ending March 2015. While doing so it also boldly conveys that India has surpassed China on this front. But there are enough chinks in the numbers being thrown at us which have potential to again prove former British Prime Minister Bejamin Disraeli’s famous quote ‘There are three kinds of lies – Lies, Damn lies and Statistics’.

Many experts say that tardy progress on the ground does not at all help one believe that Indian economy really grew at a rate of 7.5%. The results declared by large blue chip companies in both public and private sector for the period ending March 2015 quarter clearly bolster that doubt. None of the seven ‘Maharatna’ companies reported profit growth. Rather they have reported, as the table below reflects, significant decline in net profit compared to the corresponding period in the previous year. Maharatnas are not alone in this profit shrinkage horde. Most large blue chip companies; barring few like HUL, State Bank of India, Airtel etc; too, have reported profit decrease.

Q3 2014-15 Net Profit of ‘Maharatna’ Companies
Company name	Decrease in Profit (in %)
ONGC	19
Gas Authority of India Ltd (GAIL)	53
Bharat Heavy Electicals Ltd (BHEL)	52
Coal India	04
Indian Oil Corporation	33
Steel Authority of india Ltd (SAIL)	26
National Thermal Power Corporation (NTPC)	05

Q3 2014-15 Net Profit of large Bluechip companies in Private Sector
Company name	Decrease in Profit (in %)
Bharat Petroleum	30
Tata Motors	56
Mahindra & Mahindra	39
Hero Motors	14
Bajaj Auto	18
Ashok Leyland	36
Punjab National Bank	62
Bank of Baroda	48
TCS	30
Infosys	05
Tech Mahindra	23
Hindalco	36
L&T	27
DLF	22
Sun Pharma	44
Wockhard	54
Adani Power	71

 The above numbers clearly show that bulk of industries have underperformed last year, which itself was not a great year. Another statistics inform that 35 companies that make National Stock Exchange of India Nifty index have reported profit drop or loss. When so many large companies of the country have fared worse than the previous year, doubts about 7.5% GDP growth rate will surely creep in. 

There are other sets of numbers which put the 7.5% GDP growth rate claim in dock. The India Industrial Production (IIP) maps industrial production every month. Government of India declares IIP rate every month.In the twelve months of FY 2014-14, highest IIP rate was reported in the month of May 2014. In that month the IIP growth rate was 5.6% . There were months when the IIP rate was negative. The average IIP growth rate for whole 2014-15 is a mere 2.3%. When the Industrial production growth was only 2.3%, a GDP growth rate of 7.5% can be possible only when other sectors compensate. The May 29 press release of statistics department does not give any indication of such compensation from other sectors. The press release informs that ‘agriculture, forestry and fishing’ sector had a paltry growth rate of 0.2 % in 2014-15, ‘mining and quarrying’ grew at only  had a growth rate of only 2.4% and ‘construction’ sector grew at 4.8%. All these important sectors grew at significantly less rate than the claimed GDP growth rate. The only sector which showed a substantial growth rate is the service sector which reported 10.7 % growth. But service sector grew more for a different reason. Economists say that the significant rise in taxes, including service tax, has resulted in an inflated growth rate for the service sector. Learned economists further doubt the GDP figures by citing its incompatibility with Gross Value Added (GVA) figures. Majority of economists repose more faith in GVA than the GDP in assessing economic trends. GVA is total output minus total intermediate consumption.  In a recent television interview Dr Pronab Sen, Chairman of Statistical Commission, said that India’s GVA for the quarter ending March 2015 was only 6.1% which was less than its previous quarter. GVA has direct relation with GDP. GDP = GVA + Taxes on products - Subsidies on products. While the GVA has decreased the GDP can grown only when taxes on products have increased and subsidies on products has decreased. In such case, GDP is not a trustworthy indicator for measuring an economy.

India’s external trade, too, forces us to doubt GDP claims. In the current age of open economies, growth in external trade is an important indicator of overall growth in economy. But, in the FY 2014-15, India’s export as well as import shrunk. Export fell 1.5% and import fell 0.6%. When both export and import has fallen and gross external trade has shrunk, a rise in GDP growth rate does not make much sense. 

As we doubt the GDP growth rate claim, we must not also forget the abrupt change in methodology to calculate GDP. Last year government changed the base year from 2004-05 to 2011-12. They also decided to adopt market price against the earlier practice of factor price. Because of this technical change in methodology, India’s GDP growth rate steeply rose to 6.9% in FY 2013-14. The previous estimation, based on the earlier methodology, had reported a GDP growth rate of 4.7%. So, a mere jugglery in methodology created a set of numbers which gave an impression as if our economy has suddenly changed gear. After all, a 6.9% growth is certainly far more alluring than a 4.7% growth rate. While there are a lot of suspicion about the GDP numbers including the methodology, a recent sharp revision in the GDP rate of previous quarter has only increased the doubt further. Earlier government had declared that the GDP growth rate for quarter ending December 2014 was 7.5%. Then also government had blown its own trumpet of how it has managed a very good growth rate. Now, that number has been revised from 7.5% to 6.9% which is a big revision. Revision of an earlier estimation is not new and may be required if new set of data comes, but revision from 7.5% to 6.9% is too big a revision to avoid notice. Further, this revision shows that there has not been any change in growth rate as the corresponding quarter in the previous financial year too had a GDP rate of 6.9%.

While GDP has largely been used mostly by economists till now and was considered as a technical thing, the situation has changed now as it is being used for political messages too. Citing the current estimation of 7.5% growth rate, government of India is telling masses that it has now marched over China. Such kind of message definitely appeals the common people. But, unfortunately, the numbers cannot be used in so simple terms. If we believe the GDP estimation and a 7.5% growth rate in India, then it is of course true that India has surpassed China as China has reported a drop in its GDP rate of 7%. But the comparison with China is wrong on at least two counts. Both countries adopt different methodology to calculate their GDP. There are doubts over China’s method of calculation as well. There are interesting stories of how combined GDP of China’s provincial states, rather than equal the country GDP, instead country GDP by leaps. China too had changed its methodology of calculating GDP last year. Whatever be the case, comparing growth rate of both countries is not as simple as is being made out. Secondly, two vastly different economies which significantly differ on size and nature should not and cannot be compared based on their GDP growth rate. Poverty and civil war ravaged African nations South Sudan and Ethiopia are having GDP growth rate in excess of 10%. Will that mean that those countries are performing better than India or China?  Similarly, highly developed economies like USA, UK, France etc are having much GDP growth rate. Will that mean that those countries have become worse than India? Even a 20% growth of a poor family will still yield a net addition which will be pretty insignificant to say one or two percent growth of a very rich family. Comparison of India with China is fraught with that danger. China’s per capita GDP is four times bigger than that of India. Thus, a growth rate of 7%  in China will still yield that country a far bigger net addition in wealth and resources than what a 7.5% or 8% growth rate would do for India.

GDP, though has been challenged by many economists, still is being used to measure economies. But, the trustworthiness in it is dwindling fast. The data can be manipulated quite easily. In such circumstances it is probably hugely premature to cite India’s GDP leap and blow trumpet about India’s growth trajectory.