This is no mean growth reversal

Official estimates had pegged GDP growth rate at 6.2 per cent in 2011-12. That number was arrived at, taking into consideration the impact of the RBI’s efforts to control inflation. The economic sluggishness brought about by the policy environment was also an implicit factor.

However, the effects of relentless monetary tightening in 2010-11 and 2011-12 showed up in GDP growth of just 3.8 per cent in 2011-12 — an alternative estimate made by the finance ministry in its quarterly review for April-June, 2013-14.

Thus, monetary tightening has had a more severe impact than was anticipated. This also underscores the need for growth-supportive policies without further delay.

From Hype to Gloom

The alternative growth estimates provided by the finance ministry for the period 2006-07 till 2011-12 questions the received wisdom about the India growth story.

Despite the global financial crisis in 2008 and the sovereign debt crisis in 2010, the Indian economy grew at an impressive average rate of 8.5 per cent between 2003-04 and 2010-11.

The robust growth performance in the post-2000 period, especially during 2004-08, encouraged investment banks and international consulting firms to expect India to play a larger role in the global arena.

For instance, the PricewaterhouseCoopers (PwC) report titled World in 2050 published in January 2011 labelled India a “growth tiger” that would increase its share in world GDP from 2 per cent to 13 per cent to emerge as the third-largest economy after China and the US at market exchange rates in 2050 —after being in 11th position in 2009.

In public-private partnership (PPP) terms, India is projected to be the second-largest economy after China in 2050, up from fourth position in 2009.

The PwC report was followed by the India Super Cycle Report published by the Standard Chartered Bank in May 2011.

The PwC report projected India to be a star performer of the next growth super cycle, becoming the third-largest economy in the world by 2030 with around 10 per cent of the world GDP.

Backed by its creative potential, emerging middle class and demographic dividend, India, according to the report, can grow at more than 9 per cent in the coming two decades — faster than China. These reports created a sense of euphoria.

It was not long back that the Prime Minister had envisioned that India would grow at 10 per cent a year.

However, growth slumped to 6.2 per cent in 2011-12 and reached a further low of 5 per cent (mainstream estimates) during 2012-13. The low growth has prompted many rating agencies to threaten a downgrade unless concerted policy measures are taken to revive growth.

It is no surprise, then, that the sense of euphoria has been replaced by a sense of gloom.

New Growth Numbers

The Finance Ministry report provides alternative estimates of growth numbers for six years (2006-07 to 2011-12) based on a research note prepared by Arbind Modi. Modi has re-computed the nominal GDP numbers by re-estimating the output from the organised commercial sector (comprising non-departmental and private enterprises) and using the Central Statistics Office estimates of gross value added for all the other sectors.

He has re-estimated the output from the organised commercial sector based on electronically filed income tax returns.

A comparison of the estimates of output from the organised commercial sector by the CSO and Modi reveal that the former underestimated the output from this sector in all the six years under consideration.

In fact, Modi’s sectoral estimates in 2006-07 are 16.5 per cent higher than that of the CSO; this has consistently increased in the successive years to reach 35.3 per cent in 2010-11.

The organised commercial sector’s output according to Modi’s estimate was 22 per cent higher than that of CSO in 2011-12.

As a result, the alternative series of nominal GDP is higher than the CSO estimate by 5.3 per cent in 2006-07 and 8.6 per cent in 2011-12.

The new estimates of nominal GDP can be used to compute the real GDP growth for 2007-08 and 2011-12. By applying the GDP deflator-based inflation computed from the CSO estimates of GDP to the nominal GDP growth estimated by Modi, we get an alternate set of real GDP growth numbers for these years.

The chart contrasts the real GDP growth obtained from the nominal GDP numbers estimated by Modi and the CSO. As the chart indicates, the Modi estimates indicate that the CSO has been underestimating India’s real GDP growth for the years 2007-08 till 2009-10. For the year 2010-11, both the CSO and Modi estimates converged and in 2011-12, the CSO overestimated growth by almost 2.5 per cent.

Meaning of New Numbers

The new GDP numbers also indicate that resource use inefficiency in the Indian economy during the 12th Plan was less than what was believed earlier.

Resource use efficiency during a period is captured through the incremental capital output ratio (ICOR). ICOR is computed as the ratio of change in output during a period to the investments made during that period.

The ICOR for the 12th Plan, computed as the ratio of change in real GDP to the investments (gross fixed capital formation plus change in stocks) made during the five years, turns out to be 4.6. This is much lower than the ICOR of 5.1 computed with the GDP data reported by the CSO.

The higher nominal GDP numbers have significant implications for deficit and debt indicators which are closely watched by international rating agencies.

As the fiscal deficit and debt indicators are represented as proportion of the nominal GDP, these ratios would appear much less alarming with a higher denominator.

No matter which GDP numbers we use, the need for restoring growth at the present juncture can hardly be overemphasised.

(The author is Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)

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