India announced revisions to its GDP computation. The base year for prices changed from 2004-05 to 2011-12. So, if you measure what produced in 2013 and in 2014 at 2011-12 prices than at 2004-05 prices, naturally, they would have a higher monetary value unless prices have declined in the intervening period! In the case of India, they rose alarmingly, actually. Then, why does not the economy look bigger and better? What statisticians gave with one hand, they took away with another. Their stroke of pen or keyboard gave India more manufacturing and mining but less construction, agriculture and services. Hence, India is not alarmingly de-industrialising. In fact, the share of industry now (end of March 2014 that is,) 30.5% vs. 24.8% under 2004-05 prices. Share of services has dropped from 57.0% to 50.9%. Voila! India is re-industrialising!! Sarcasm apart, the truth is that we simply do not know if it is true or not. We will know only with the benefit of hindsight and much later.
Many commentators have cottoned on to the revision in GDP growth for 2013-14 to 6.9% (from 5.0%) to argue that the economy had done far better under UPA than feared. In general, government policies can hurt more than they can help economic growth. Second, there are other indicators that continue to confirm India’s sub-par economic performance under the UPA governments (two of them) than economic growth: stubborn and high inflation rates, high current account and fiscal deficits, pre-emption of national savings for wasteful government spending, tax disputes, collapse in the currency, etc.
Now, for the all important question of whether GDP growth at 6.9% in 2013-14 shows that the Indian economy has far less slack, it is not that simple to deduce that the economy was already growing at close to or above potential. Symmetry demands that potential GDP growth estimate too must have risen. In any case, whether the economy is overheating or not is deduced from other economic thermometers like inflation and current account deficits. They are not flashing red. So, the argument that the central bank – Reserve Bank of India meets on Tuesday to decide on interest rates – has far less room to cut rates is too simplistic.
In truth, there are other reasons for RBI to be cautious about cutting rates or they could cut rates and do something more. I have written about them in my MINT column for Tuesday. I shall post it here tomorrow.
In the meantime, here is the link to the Press Release by the Ministry of Statistics and Programme Implementation.