NEW GDP SERIES: A CLOUD OF SMOKE
Abhijit Mukhopadhyay is an economist. He can be contacted at abhijitmukhopadhyay[at]gmail.com.
A day after saying that one needs to be careful while calculating GDP, and thereby creating headlines about the authenticity of new GDP series and its measurement process, the RBI governor Raghuram Rajan in his delivery of C. D. Deshmukh Memorial Lecture at the RBI clarified that his statement was a general statement about the GDP measuring method and has nothing to do with new GDP numbers. He further clarified that he thinks the numbers are “broadly” correct.
This may be to reassure that everything is fine, but the issues about the GDP numbers remain in focus. What many economists were grumbling about in the past few months, sometimes in their personal spheres, has now arrived in public. And this is because the GDP growth numbers, particularly the manufacturing numbers, are showing results which are not logically backed by other growth indicators used by industry and economists. A careful and detailed look is needed in this.
Ministry of Statistics and Programme Implementation, which is in charge of this new calculation, has published some clarifications in its website about the calculation of GDP with the new base year 2011-12.
Firstly, the choice of new base year was a tricky one simply because of the 2008 Trans-Atlantic Crisis. Usually any statistically “neutral” year in the beginning of a decade is chosen as the base year, the earlier series being based on the year 2004-05. However, the crisis disrupted that statistical “neutrality” and made the options limited. As a result, though there are indications of deterioration in Indian economy post-2011 still 2011-12 has to be chosen as the base year because in subsequent years the economy went further downhill.
Then comes the new method of measurement. Earlier, the measurement used to be done by calculating the factor costs of production, but now it is shifted towards value added method. In value added method, only addition of value in a particular production process is taken into consideration. For example, an iron ore producer produces Rs. 500 worth of iron and her value added will be Rs. 500; a steel producer uses that iron and produces Rs. 1200 worth of steel and her value added will be Rs. (1200 – 500) = Rs. 700; a car component producer uses that steel to produce a component worth Rs. 2500 and her value added will be Rs. (2500 – 1200) = Rs. 1300, and so on. Therefore, output produced in this value added method will be Rs. (500 + 700 + 1300) = Rs. 2500. Earlier, the factor costs at each stage used to be calculated to derive the final output. But, factor cost is essentially the cost of production while value added is in the form of selling price of the output.
Now, this is a major shift and as a result the series in GDP at factor cost also has been discontinued. Statistically, according to the ministry this also has resulted into higher value of GDP. There can be many reasons behind that. For example, simple output value addition in the factor cost method will be less than value added if we consider brand value of products. The value of a branded shoe will be much higher than the value calculated only considering the input costs incurred. New GDP series apparently takes things like brand value into consideration.
The biggest change in methodology is apparently in manufacturing GDP calculation. In the old series, the first estimate used to be derived by applying the IIP (Index of Industrial Production) growth to estimates of the previous year. In the second step, these estimates were then updated with the ASI (Annual Survey of Industries) figures when those were available.
Both IIP and ASI data are establishment based, which means reporting of output and value added (in case of ASI) for the producing establishment. The implementation of MCA-21 programme supplemented with the data base of BSE and existing RBI studies, according to the ministry, has given access to corporate financial statistics which have been incorporated in the new series for measuring manufacturing value added. This change from establishment to enterprise level data has significant implications for value added and growth.
In a small entity, there is usually not much difference between establishment and enterprise value added. But for large entities, these differences are significant as post-manufacturing expenses like marketing and other services are also taken into consideration in value added. This component of value added was earlier being excluded from GDP because it was not covered in ASI.
These changes in measurement of manufacturing value added influenced the new series significantly. Apart from that, the methodology is also changed in some segments of the services sector. Even in agriculture, the sector gross value added now comprise of estimates from crop production, horticulture, animal husbandry, fishery and forestry. As a result, even though there has been a decline in agricultural production in last two years, the new series show positive growth in agriculture for 2014-15.
Now the question arises – does it imply the widespread concern about slowdown is misplaced? The Ministry answers the question in negative by saying that the new series captures the value chain better and probably more enterprises are now captured in valued added, but essentially if there is a slowdown in any part of the economy then that cannot be erased by the mere statistical method of measuring.
And here begins the confusion about the new series. While the government is claiming that the economy is recovering well based on these new sets of data, other standard indicators of growth are not substantiating that claim. For example, second and third quarter estimates show roughly around 7.4 per cent growth of GDP which is the fastest among major economies of the world currently, but if we look at the bank credit to industry (which is a standard indicator of industrial growth) during March to October of the current fiscal year credit growth to industries shows negative growth rate of 0.3 per cent. Similarly, Purchasing Managers’ Indices (PMI) calculated by different entities like Nikkei Markit India (which are indicators of industrial growth), or motor cycle sales growth (which is an indicator of rural demand growth) kept on showing subdued or negative growth figures for good parts of the current fiscal.
Even the trained economists are now asking one simple question – in the light of subdued mood in almost every sector of the economy how come the GDP growth figures are showing such high figures – amidst dwindling world and domestic demand. The jury is definitely not yet out.