Don’t Order The Champagne Yet: Key Takeouts From India’s GDP Numbers

The one thing we should not do is celebrate over the GDP numbers for 2015-16, which will confirm India as the fastest-growing major economy in the world, ahead of China. The 7.6 percent GDP growth announced by the Central Statistics Office (CSO) is good, but not good enough. Trying to compare a $ 10.4 trillion Chinese economy’s 6.9 percent (estimated) growth with a $2 trillion economy’s 7.6 percent rate is meaningless.

Let us not forget how we struggled to get here.

The $2 trillion GDP figure was first sighted in 2011-12, but we finally managed to top it only four years later, thanks to weakening growth, and a crashing rupee. At the rupee’s current value of Rs 67.43 to the US dollar, our GDP figure of Rs 1,35,76,086 crore translates to a dollar GDP of just $2.01 trillion. A decline in the rupee will wipe that out again.

Obviously, Indian GDP in US dollars is a constantly moving target. It need not hold us up right now, for there are other numbers we need to look at more closely.

First, the growing gap between real and nominal GDP is an indicator that there is some underlying inflationary potential. Nothing to fret about, but we need to be cautious. The Wholesale Prices Index, which turned positive after 17 months in deflation territory, is clearly giving the GDP deflator a boost. The gap between real and nominal GDP, which was actually negative in the second quarter (-1.2 percent), widened positively in the fourth quarter to 2.5 percent, with real GDP being 7.9 percent and nominal 10.4 percent.

This is both good news and bad news. It means underlying inflationary potential is a reality; it has to be managed with excellent supply side responses, especially when the inflation is about food. But it also means Arun Jaitley has a higher nominal GDP number to work with while calculating his fiscal deficit. Higher nominal GDP means the deficit in real terms can be lower in percentage terms, since we will have a higher denominator.

Second, it is clear that the failed monsoon of the last two years has been a real growth dampener, despite agriculture’s small share in GDP. Growth in value added has stayed flat, with 2014-15’s -0.2 percent growth in agriculture being only marginally bettered at 1.2 percent in 2015-16. The good news is that any rebound in 2016-17 on the monsoon front could easily push up GDP growth above 8 percent, other sectors remaining at least equal.

Third, the gross value added (GVA) method of computing growth (GDP is GVA plus taxes minus subsidies) is still confounding. GVA in 2015-16 shows a slowdown in mining, electricity, construction, trade (including hotels and transport), and financial services (including real estate) – and a sharp decline in public administration and defence from 10.7 percent in 2014-15 to 6.6 percent in 2015-16. One wonders how the overall GDP/GVA growth figures are robust. The spike in manufacturing from 5.5 percent to 9.3 percent could be one explanation, but not wholly convincing when the Index of Industrial Production (IIP) actually declined in 2015-16.

Fourth, the IIP is perhaps outdated, as its base is 2004, when the economy has moved on and changed complexion. Along with WPI, the IIP needs rebasing – and quickly. It is difficult to reconcile a sharp rise in manufacturing GVA with the decline in the IIP from 2.8 percent in 2014-15 to 2.4 percent.

Fifth, the continuing decline in investment – as represented by the gross fixed capital formation (GFCF) – is worrisome. From 31.6 percent of GDP in 2013-14 it fell to 30.8 percent the next year and to 29.3 percent in 2015-16. Clearly, industry is still not in a mood to invest.

Sixth, a bigger cause for concern is the declining share of exports to GDP. It is down from over 25 percent two years ago to just under 20 percent. India’s fortunes are less linked to global growth than before, though the link goes both ways: a slowing global economy shrinks exports just as a rising tide lifts all boats.

The broad message from the GDP numbers is this: we are on our own when it comes to reviving growth. No point blaming the world for slowing down.