GDP back series strengthens case for more structural reforms

K.R. Srivats New Delhi | Updated on August 20, 2018 Published on August 20, 2018

Growth story GDP growth is a necessary but not sufficient condition

India will have to do some heavy lifting on structural reforms and persist with macro-economic prudence if it were to achieve and sustain over 8 per cent GDP growth in the coming years, say economists and economy watchers.

The suggestion comes in the wake of the Central Statistics Office (CSO) making public the reports of the working group that was set up to provide an estimate of the GDP back-series with 2011-12 as the base year.

Aditi Nayar, Principal Economist, ICRA, said the new back series of GDP data highlights the volatility of Indian economic growth, with intermittent peaks in the pace of growth followed by dips.

“This suggests that sustaining a growth in excess of 8 per cent over an extended period of time may pose a challenge, particularly in the absence of a secularly supportive global growth environment,” Nayar told BusinessLine.

She said directionally, the new series is similar to the old series, which suggests that the latter was not misleading the policymakers on whether the pace of growth was accelerating or slowing down. However, the new series has revealed that the level of growth was being underestimated by the old series on a consistent basis after FY2004, Nayar said.

On expected lines

Madan Sabnavis, Chief Economist, CARE Ratings, said the back series of GDP calculated is on expected lines as the new methodology did suggest that the growth rates would be higher than under the earlier system with 2004-05 as base year.

“However, it should be remembered that the back series is based on GDP at market prices and hence the numbers cannot be compared with the earlier ones which was reckoned at factor cost. The approach used here is being reviewed and we need to see if any alternative is provided,” Sabnavis said.

Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, said in a research note that it is important that “we should keep pushing our structural reforms and macro economic prudence so that we continue to expand at a healthy rate even if external conditions turn adverse (as being witnessed now)”.

Trends seen

Outlining the trends that emerged from the back-casted series that merits attention of policy makers, the SBI Research Note highlighted that the GDP and GVA series are in tandem. The new series (as like the old series) shows that on at least 12 out of 18 occasions till 2011-12 GDP lagged GVA. A plausible reason for GDP lagging GVA even in 2005-06 and 2006-07, when India’s growth was in excess of 9.5 per cent, was the significant scaling up of fertiliser subsidies from 2005-06 following poor agricultural growth.

The second trend highlighted by the SBI research note was that in 2008-09, GDP was higher than GVA by a massive 301 basis points on the back of huge fiscal stimulus (subsidies growing by a massive 83 per cent). The fiscal stimulus did push up the growth rate to 10.8 per cent in 2010-11 from 4.2 per cent in 2008-09 but it did not sustain for long with a jump in inflation.

Third, India was also witness to massive nominal; growth in GDP beginning 2003-04 and it touched a peak of 21 per cent in 2010-11, but also aided by a higher deflator. In fact on the back of fiscal stimulus, inflation as measured by GDP deflator averaged 8 per cent for the five year period ended 2012-13.

Fourth, global growth had a roller coaster impact on India’s GDP growth with growth being significantly impacted in both directions, the SBI Research note added.

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Published on August 20, 2018
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