Govt panel head echoes economists, says FY16 GDP growth exaggerated
Many including Reserve Bank of India Governor Raghuram Rajan had raised doubts about the new GDP series, which showed the Indian economy growing at a much faster pace than earlier estimated. Now the head of an official committee reviewing the series says some of those doubts may have been justified.
Pronab Sen, who heads a three-member government committee to review the new series, said that GDP growth, especially manufacturing sector growth in the year ended March may have been overstated. "The manufacturing sector is possibly overstating real growth... It will eventually come in the headline numbers also... The point is I don't know what is the effect on the other sectors. The double deflation problem is particularly acute in the manufacturing sector," Sen told Cogencis.
"So (GDP growth of) 7.6% is probably overestimating growth," he said. Double deflation is the technique used to estimate real value added of an industry. In the double deflation method, real value added is measured as the difference between real gross output and real intermediate inputs.
According to advance estimates released by CSO in February, the Indian economy is likely to have grown 7.6% in 2015-16, driven primarily by 9.5% growth in manufacturing sector.
The manufacturing sector data in GDP is in sharp variance to the Index of Industrial Production data, which has estimated manufacturing sector growth in Apr-Feb at 2.3%.
Sen, who was the chairman of National Statistics Commission when the new GDP series was introduced by the Central Statistics Office in 2015, said the panel is likely to submit its report soon. Many, including Rajan and Chief Economic Adviser Arvind Subramanian, had raised doubts about the new GDP series as it showed that the Indian economy was growing much faster than earlier believed. According to the new series, India's GDP growth in 2013-14 jumped to 6.9% from 4.7% estimated in the earlier series.
"Most of the data that we have seen for 2013-14, except inflation which was very strong, give us a sense that there was slack in the economy... So, we find it hard to see the economy as rollicking in 2013-14," Rajan had said after the new data was released.
Subramanian had gone one step further and called the new data puzzling and mystifying.
"I am puzzled by the new GDP growth numbers... This is mystifying because these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy. The year 2013-14 was a crisis year – capital flowed out, interest rates were tightened and there was consolidation – and it is difficult to understand how an economy's growth could be so high and
accelerate so much under such circumstances," Subramanian had said. Many economists think that the GDP growth in the new data is 1-2 percentage points higher than the old series.
Sen said the main reason for the overestimation is the GDP deflator as CSO does not have any mechanism to calculate input prices. In the absence of a an indicator for input prices, the value of input as well as output is derived on the basis of the Wholesale Price Index, which is largely an output price indicator, he said.
If input prices and output prices move in sync, the data would be fairly representative. Otherwise, the pace of growth, especially in the manufacturing sector could end up being overstated or understated, depending on the price trends, Sen said.
In a situation where output prices are lower than the input prices, like in 2015-16, the manufacturing growth would be exaggerated, which seems to have been the case last year, he said.
While the problem existed even in the old series, it has become more jarring in the new series, which captures data at a faster pace, Sen said. "It was there earlier also. Now that it's getting captured earlier, it's getting more attention, that's all," he said. -Cogencis