Recently released GDP figures have sprung a surprise, baffled experts and overturned the government's own data and projections. What could be the reason?
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GROSS Domestic Product (GDP) figures have sprung a surprise— showing a growth of 8.4 percent in Quarter 3 of 2023–24, on top of the previous two quarter's growth of 8.2 percent and 8.1 percent.
The annual growth for 2023–24 is projected at 7.6 percent. But given the growth rates in the first three quarters, it is likely to be above 8 percent, unless the economy decelerates sharply in Q4, of which there is little sign.
Experts are embarrassed that how could they be so far off. In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.
Various foreign credit rating agencies had revised the expected growth rate to only around 6.5 percent. The International Monetary Fund (IMF) expected a 6.3 percent rate of growth.
“In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.
The Union finance ministry of India said that the rate of growth would be comfortably above 6.5 percent, but did not say it would be over 8 percent. The largest Indian bank, which usually gives a glowing picture of the economy, which then gets amplified in the media, just a day earlier had predicted a rate of growth of between 6.7 percent and 6.9 percent. It argued that there was a moderation in economic activity in Q3.
Media reports had been mentioning that the festive demand in October and November had been moderate— not the expected big boost to economic activity.
Reports were that the rural market was subdued. El Nino was being mentioned as a reason for problems in agriculture. High cereal prices, in spite of a ban on exports of rice and wheat, were being cited as a reason to doubt the official production figures of agriculture.
Also read: The K is Indian GDP's reality: Why deny?
A moderation of profits in the corporate sector due to a slowdown in demand was being cited as another signal of slow growth. The war in Gaza was creating problems in shipping and leading to an increase in the prices of imports.
A slowdown in China, Europe, Britain and Japan was the reason for the slowdown in exports. All these were the reasons why the Q3 numbers were expected to herald a slowdown.
Despite these factors, growth has accelerated. This mystery needs to be resolved.
Sectoral performance compared to Q3 of 2022–23 shows higher growth in manufacturing, mining, electricity, gas, public administration and so on.
There has been a sharp increase in mining, from 1.4 percent to 7.5 percent, and in manufacturing from -4.8 percent to 11.6 percent.
Another boost is from net taxes, which have increased from -2.6 percent to 32 percent. In the case of construction, growth remains unchanged at 9.5 percent.
In the case of group trade, hotels, etc., growth declined from 9.2 percent to 6.7 percent, for the group of financial, real estate, etc., the drop is from 7.7 percent to 7 percent. The biggest drop is in the group agriculture, livestock, etc., from 5.2 percent to -0.8 percent.
“Another boost is from net taxes, which have increased from -2.6 percent to 32 percent.
Analysis of the expenditure components of GDP shows a decline in the share of private final consumption, from 61.3 percent to 58.6 percent and government final consumption from 8.7 percent to 7.8 percent. The external sector, represented by exports minus imports, shows a decline from -0.7 percent to -1.8 percent.
These three engines of growth are pulling growth down.
So the growth acceleration is coming from an increase in Gross Fixed Capital Formation, from 31.8 percent to 32.4 percent, in valuables, from 1.1 percent to 1.7 percent and in discrepancies, from -3.3 percent to 0.2 percent.
This pattern of increases and decreases in different components of GDP can help resolve the mystery.
First, the sharp increase in net taxes suggests that the incomes of tax-paying citizens have risen sharply. They belong mostly to the organised sector of the economy.
The unorganised sector hardly contributes to the taxes since most of the incomes of this sector are below the taxable limit and they are exempt from the Goods and Services Tax (GST).
So, the sharply higher net tax collection indicates that incomes of the well-off sections belonging to the organised sector have sharply increased.
Second, the decline in the share of consumption in GDP also points in the same direction. The well-off citizens consume a smaller percent of their income while the poor consume most of their income. Thus, a shift of incomes in favour of the well-off will lead to a decline in the share of consumption in GDP.
Third, the decline in the share of agriculture in GDP also suggests the same. It is the largest component (in employment terms) of the unorganised sector. About 85 percent of the farmers are small and marginal cultivators operating less than 5 acres of land and have low incomes from farming. As their income declines, the share of consumption in GDP would drop.
Fourth, the government has shifted its expenditure towards capital accounts so the share of its consumption has declined.
Further, the government's capital expenditure is shifting towards capital-intensive sectors and away from labour-intensive ones. This boosts the organised sector at the expense of the unorganised sector.
Also, the government's stated aim is to formalise the economy through digitisation which is damaging the unorganised sector and benefitting the organised sector.
Finally, the sharp increase in the 'discrepancies' points to the errors in the data. Both the production side and the expenditure side of GDP have large errors. To unravel the mystery, there is a need to understand these errors.
For the quarterly GDP estimation, the unorganised sector (except, for agriculture) data is not available. That is also the case for most of the organised sector. So GDP estimation is based on various assumptions and approximations. How valid are these?
According to the press note, GDP estimates are based on 'indicators', 'using the benchmark-indicator method'.
“The government has shifted its expenditure towards capital accounts so the share of its consumption has declined.
Further, previous year estimates are 'extrapolated' using relevant performance indicators. Indicators used are the Index of Industrial Production, the financial performance of listed companies in the private corporate sector, air and rail traffic, etc. These are largely from the organised sector.
In brief, the quarterly estimates are largely based on limited organised sector data (but for agriculture). The limited organised sector data is used to proxy the unorganised sector. This washes out the decline in the unorganised sector and the economy appears to be doing well.
This is not the only lacuna. Projections from the previous year's data are used. If the previous year's estimates were in error, that would impact the current year's estimates.
If the economy suffers a shock, a projection from the previous (normal) year would overstate growth. The methodology would require a change. That would be true for the pandemic and the accomopanying lockdown, and demonetisation. The impact of the shock would continue to affect the estimates, based on projections from the previous year, for several years.
Consumption data from the recently released household consumer survey shows per capita rural and urban consumption as ₹3,773 and ₹6,459 per month. But GDP data gives a figure of ₹9,896. This is a result of over-estimating the production of the unorganised sector which produces a large part of the consumption goods.
Thus, even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.
The above points to why even if parts of the economy are languishing, GDP data shows the opposite. This is not just to do with the large gap between GDP and Gross Value Added.
“Even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.
There is evidence of growing disparity in the economy since the unorganised sector is declining while the organised sector is growing— the K-shaped pattern of growth. The recently released Consumption Survey data also points to this.
Clearly, the method of estimating the quarterly GDP based largely on organised sector data overestimates growth, especially when there is a shock to the economy.
At best, the recently released GDP data represents agriculture and the organised sector but not the entire economy.