The ever-thoughtful and thought-provoking Shankkar Aiyar at ‘New IndPress’ wrote about India’s GDP growth estimate for the fourth quarter of 2014-15. The government reported that India’s Real GDP at market prices rose 7.5% (y/y) in 1Q2015. The growth rate was 6.6% in 4Q2014. Gross Value Added was 6.1% (y/y) down from 6.8% in Q4. Yet, if we exclude agriculture and government consumption (held down in the first quarter of the calendar year because it was the last quarter of the fiscal year 2014-15), GVA rose 9.1%, accelerating from the rise of 7.1% in 4Q2014 (courtesy: Sonal Varma of Nomura). GDP deflator rose a mere 0.2% (y/y) in 1Q2015 and hence, Real GDP is exaggerated. IMF reported in its World Economic Outlook that inflation as measured by the GDP deflator in the calendar year 2014 was just 4.08%, down from 6.25% in 2013.
Clearly, the economy does not feel like it is growing at 7.5%. Some say that the Indian English language media laments about sluggish growth because their corporate benefactors are not growing. In other words, they do not look beyond the corporate sector for drivers of growth. But, one doubts if steel and cement consumption, sale of automobiles, etc., are indicating robust economic activity. Shankkar Aiyar notes how some of the indicators such a credit growth were growing strongly when the Indian economy was growing at 7% in 2004, for example:
For a perspective, take a look at 2004-05, the year bequeathed to UPA by the Vajpayee regime, the economy of India grew at 7.05 per cent. This was fuelled by a 28.5 per cent growth in exports and a 30.9 per cent growth in credit. In comparison, in 2014-15 while the economy grew 7.3 per cent, exports contracted by 0.8 per cent and credit growth was barely 9.5 per cent. [Link]
Shankkar also notes electricity consumption numbers not backing up the growth number:
The story of electricity is best told by the statement in Parliament on no takers for 100 million units of power. The Central Electricity Authority reveals that Plant Load Factor (PLF) across India has dropped from 68 per cent in April 2014 to 62 per cent in April 2015 and the decline has been steady. The PLF in states is worst—down from 63 per cent to 55 per cent—and thanks to mounting losses, no new power purchase agreements have been signed for over two years. Add to this the story of stranded projects weighing down bank balance sheets.
However, in his interview with Barqa Dutt of NDTV, Arvind Subramanian noted that indirect taxes collections had picked up in April, even after excluding the rise in revenues due to tax rate changes initiated in the budget. The numbers are there in his slide presentation (Slide No. 13). Both Customs and Excise Duties are growing annually at 13.5% and 8.8% respectively whereas they shrank 11.7% and 3.9% in April 2014. On that basis, he back-calcuates – assuming revenue buoyancy rates of around 0.9 and 0.8, nominal GDP to be around 10.9% to 12.3%. Assuming deflator of around 3%, he reckons that real GDP was growing at the rate of 7.7% and 9% in April this year. His presentation can be found here.
My good friend Neelkanth Mishra of Credit Suisse notes that government spending, released from the yoke of having to deliver on the fiscal deficit target of 4.1%, went up by 28% in April. He noted that demand for cement had turned positive in May. But, of course, we should remember that the GDP growth estimate of 7.5% was for 1Q2015.
In an article in Reuters that discusses poor loan recovery for Indian banks, this short paragraph caught my attention:
Commercial paper issuances jumped more than 80 percent last fiscal year, according to estimates from rating agency ICRA. Including commercial papers, bonds and overseas borrowing, total credit available in the system grew 14.5 percent last year — outpacing growth in bank loans. [Link]
To the extent I tried, I could not locate a regular time-series of Total Overall Credit and its growth rate that is publicly available. We know that Non-food Commercial Bank Credit growth rate is tepid.
But, if overall credit growth is not bad and that demand for credit is being met from sources other than public sector banks, perhaps, the true growth rate is not too far from the reported 7.5%? So, does it mean that we are not looking at the right places?
In sum, it seems fair to say that the economy might have bottomed out and might have even begun to re-accelerate gradually but we are unable to fully account for the 7.5% real growth rate reported by statistical agencies. That is probably true of most countries in the world today. India may not be the most egregious outlier (in the gap between reported and perceived growth rates) in this respect.