India’s official gross domestic product or GDP data is now officially a joke. There have been controversies about the methodology of the new series ever since it was introduced in 2015. There are major discrepancies between the new series and the old, and there are discrepancies between verifiable high-speed data, and the GDP numbers.
Now it turns out that the cornerstone of the new series is based on shifting sand. The new series uses corporate data gleaned from MCA-21 database. A National Sample Survey Office or NSSO survey discovered that 36% of the companies listed in the database either did not exist, or were misclassified.
Applying the old dictum “Garbage in, Garbage out”, that means the GDP numbers are – if not exactly garbage – less than trustworthy if we are going to be polite about it.
Many economists have already moved away from those numbers and started to use their own personal models to estimate economic growth rates. Those models all indicate that India’s economy is in slowdown, and likely to face severe structural problems as well.
Problem with the new series
In brief, the new methodology has a base date of 2011-’12. When, after much delay, an official back series was released in November 2018, it stated that growth between 2004-2012 was lower than indicated in the earlier data series.
As it happens, the growth acceleration – according to the new series – coincided with the period when the BJP government was in charge, while the downward revisions affected the period when the Congress-led United Progressive Alliance government was in charge between 2004 and 2014.
This is perhaps not coincidental. PC Mohanan, a member of the National Statistical Commission who resigned in protest in January, said that the commission’s back-series calculations were rejected by the government because they indicated that growth rates during the United Progressive Alliance years were higher.
The first problem with the new series was that it consistently failed to align with other verifiable, high-speed and long-term indicators. According to the new series, GDP growth was zooming at a time when unemployment was up, corporate results were flattening, car sales were flat, railway freight movement was barely growing, tax revenues were lower than expected, and so on.
The International Monetary Fund’s chief economist and many other economists, pointed to the fact that there was a problem with the deflator. The deflator is the ratio by which nominal numbers are changed in order to allow for inflation effects. Those problems with the deflator remain but now, we must assume that the nominal numbers are suspect as well.
The verifiable bad news
Let us do a quick recap of the verifiable bad news. Automobile sales across all categories – two-wheelers, passenger cars, commercial vehicles – have trended down sharply over the past few months. The number of vehicles sold has declined by over 10% in the 2019 year.
Auto sales reflect demand. Commercial vehicle sales are a good proxy for business activity. The auto industry has a long value chain, absorbing materials ranging from basic metals, rubber, leather, plastics, composites, to high-end electronic gadgetry. It is a big contributor to financial sector activity since auto manufacture is capital-intensive and almost every vehicle is financed on EMI.
Automobiles generate a lot of revenue for the advertising and marketing industries too. It is a prime energy consumer. Service, repair and maintenance of automobiles generates a lot of jobs. There has never been a period of high GDP growth when auto sales have fallen.
Tax revenues are well below Budget estimates of February 2018 and well below the revised estimates of February 2019. As a result, the central fiscal deficit at Rs 8.5 trillion (end February 2019) is about 33% higher than the revised estimates made in the February 2019 Interim Budget.
I am reluctant to use GDP as a denominator for obvious reasons. But if you do use the official GDP estimates, the central fiscal deficit was running at 4.5% of GDP after 11 months, instead of the targeted 3.4%.
The trade deficit has hit $176 billion in 2018-’19. Exports grew 9.1% to $331 billion while imports grew 9% to $507.4 billion. Exports missed the target of $350 billion. Anecdotally, many exporters say that they have been forced to cut back on activity because of glitches in the Goods and Services Tax regime that lead to their working capital being tied up due to the very slow processing of refunds.
Currency in circulation and unemployment
Remember demonetisation – the 2016 experiment that the BJP has so carefully not talked about during the 2019 election campaign? Prime Minister Narendra Modi had then said: “The magnitude of cash in circulation is linked to corruption.”
Well, cash in circulation is now well above pre-demonetisation levels. Not only did demonetisation cause the deaths of over 100 people and hobble economic activity, it did not even pull down currency in circulation permanently, which was supposedly one of its goals.
Due to the unreliability of GDP numbers, it is hard to normalise it as a ratio of GDP. But currency in circulation has increased by 22% since November 2016. Given that this was a period of low growth, currency in circulation is probably around the same ratio of GDP as it was before demonetisation.
The Index of Industrial Production, which is a monthly measure of manufacturing, grew by 3.6% in 2018-’19, which is the slowest in three years, falling from 4.4% (2017-’18).
The Purchasing Managers’ Indices are monthly surveys of corporate purchase managers across manufacturing and services. They indicate marginal growth in April and a slowdown across both services and manufacturing.
The debt crisis continues with banks struggling to contain vast Non-Performing Assets while non-banking financial companies are also taking a beating after the collapse of infrastructure development and finance company IL&FS. The power sector alone has over Rs 1.8 trillion stuck in stalled or failed projects.
Economic mismanagement to blame
All the indicators suggest very slow growth, and most indicators suggest that it is getting slower. The International Monetary Fund has cut back its GDP growth projections by a tiny 0.2%. Chances are there will be more downgrades of official GDP growth.
This has happened without any external crisis. It is plain and simple economic mismanagement. The next government will have to find ways to bootstrap the economy out of stagnation. The unreliable nature of the GDP numbers will make it harder to find effective policy solutions.