POV: PARSING THE GDP DATA
The macro-economic data for JulySeptember 2017 (Q2) indicates that the Indian economy may be pulling out of a trough after five successive quarters of lower GDP growth. GDP grew at 6.3 per cent in Q2, having fallen to 5.7 per cent in Q1.
The pullback is attributed to the manufacturing sector climbing 7 per cent year-on-year versus Jul-Sep 2016. This is a considerable improvement over the 1.2 per cent growth in Q1. The other big gainer was mining, which rose by 5.5 per cent after declining in Q1.
Agriculture remained in the doldrums, though, with growth at 1.7 per cent, which was even lower than the 2.3 per cent logged in Q1. Gross Fixed Capital Formation, which is a key indicator for private investment, grew at 4.7 per cent during Q2, which was better than the anaemic 1.6 per cent of GFCF growth in Q1.
Finance Minister Arun Jaitley hailed these numbers, asserting that the disruption caused by GST and demonetisation was over. The numbers did boost sentiment along with other positive data points like higher automobile sales, the Moody’s upgrade of India’s sovereign rating, the jump in World Bank Ease of Doing Business rankings etc. At the other end of the political spectrum, former finance minister, P. Chidambaram called this a “pause in the falling trend of growth” and Dr Manmohan Singh said he thought the ill-effects of demonetisation had not yet been fully purged.
The manufacturing pickup indicates that the “destocking” that preceded GST was transient. In April-June, manufacturers cut back production and sold off inventory for fear of being hit by GST disruption. “Restocking” has apparently happened in Q2, with manufacturers ramping up production.
These are preliminary estimates and the error factors may be pretty high. GDP includes net tax collections, which are fuzzy, unknown numbers for Q2, given the complexity of the new GST system.
The GST involves offsets and credits up and down the value chain, and we don’t know what net collections will be. This could work both ways—there may be a bump up or a drawdown in final estimates.
According to Chief Statistician T.C.A. Anant, the MoSPI used sales tax collections from items kept outside the GDP net to make a proxy estimate of likely tax collections. To add to complications, service tax was subsumed into GST (at a higher rate of 18 per cent GST, versus the earlier 15 per cent for service tax) and ran into similar calculation problems. Since services contribute over 50 per cent to GDP, the proxy calculations there may also have big errors.
Another factor that is hard to estimate is consumption, due to the seasonal effect of festival. Durga Puja (Navratri as North Indians call it) and Diwali are periods when household consumption spikes. At the same time, these are holidays, so industrial production drops. Since these festivals don’t fall in the same calendar months every year, distortions are caused. This year, Durga Puja was in September, while it fell in October last year. Festival consumption in September 2017 would have been higher compared with the ‘normal’ level of September 2016. So we can’t assess if consumption has genuinely improved.
There were a few disquieting data points too. Trade deficit expanded in Q2. Exports grew a bit, but imports shot up. This is a sign GST did cause disruptions—consumers turned to imports to meet demand for items that Indian manufacturers could not meet because value-chains were hit.
A second disquieting data point is the high fiscal deficit. About 96 per cent of the budgeted full-year fiscal deficit had been spent by October—the government was spending to keep growth ticking over, through the GST disruption. But it doesn’t have much leeway to continue with this strategy unless it’s prepared to let the fiscal deficit shoot up to unacceptable levels.
The GDP figures are encouraging. But they must be interpreted with caution. The final estimates could go either way—higher or lower.