Is India growing faster than expected? Or the economy actually chugging along slower than the official forecasts?
On Monday, the government estimated the economic growth for the current financial year to be 7.6%, suggesting the economy is booming. This comes despite several rating agencies, as well as the Reserve Bank of India, lowering their growth forecasts for this fiscal year from previous estimates.
Data released by the Central Statistical Office showed that GDP growth this year would surpass the government’s earlier estimate of 7%-7.5% despite a slowdown of the economy in the third quarter between October-December.
These numbers suggest that the agriculture sector shrank by 1% in the third quarter even as industry witnessed 9% growth. Services maintained a steady growth of more than 9%. Overall, the GDP for the third quarter slowed to 7.3% compared to the 7.7% growth seen in the second quarter between July-September, 2015.
Even as data shows that the economy is racing, doubts loom over the reliability of the numbers. The government had unveiled a new method to measure economic growth last year, causing economists and industry experts to question GDP calculations according to the new methodology. The announcement, two weeks ago, that economic growth in 2014-'15 had been lower than reported has added to doubts.
"The official estimates show a steady improvement in growth rate in output over nearly two years now,” said R Nagaraj, an economist at the Indira Gandhi Institute of Development Research. “But they do not square with other macroeconomic indicators – be it credit growth or output growth of scooters, or of capacity utilisation in steel or the cement industry."
He added: "International agencies have predicted somewhat lower growth rates based on other macroeconomic indicators, which show modest improvements."
Economic indicators are showing signs of a slowdown, at least in the manufacturing sector. Exports have fallen for the past 13 months, railway freight logged measly growth, and electricity requirement grew by only 2.5% between April and December last year.
The new GDP numbers may not reflect the real picture, a fear Reserve Bank of India Governor Raghuram Rajan referred to recently.
“There are problems with the way we count GDP, which is why we need to be careful sometimes just talking about growth,” Rajan said last month. “We should be careful about how we count.”
Rajan’s sentiment was evident last September, when the Reserve Bank of India lowered its annual growth forecast to 7.4% from the earlier projection of 7.6%. Even the central government went back on its projected growth estimate of 8%-8.5%, announced during the budget. When it published the mid-year economic review last November, it pegged growth at 7%-7.5% this year.
What this means is that nobody’s really sure how fast India will grow this year.
To achieve the projected growth figure of 7.6% for this fiscal year, the economy will have to grow at more than 7.7% in the January-March quarter.
This looks tough, given the contraction in agriculture reported in the latest data by the Central Statistical Office. Moreover, the winter crop sowing area was down 12.6% in November compared to the previous year, casting a shadow on the sector that hasn’t seen more than 2% growth in any quarter this financial year.
Nagaraj added that the target of 7.7% growth for the fourth quarter might be achievable if the current forecast was believable.
But is it?
Macroeconomics observer and commentator Vivek Kaul wrote a blog post on Tuesday questioning the new GDP numbers. "There is no way the Indian economy can possibly be growing at greater than 7%," he wrote. "Honestly, Indian economic growth data now seems to have gone the Chinese way – it’s totally unbelievable. And since we like to compete with the Chinese, at least on one count we are getting closer to them."
