The purpose of this note is to
compare the performance of the Indian economy in 2014-15 with that in 2013-14.
It may be noted that a large part of 2014-15 was under the rule of the NDA
government while 2013-14 was entirely under the UPA rule. This comparison will allow us to see what
improvement has taken place in the Indian economy and where additional effort would
be required in the coming years. My focus is on the real economy (that is,
actual production or Gross Domestic Product, GDP) and not on prices. As far as
prices are concerned, I would like to only note that the average rate of
inflation (based on the Consumer Price Index), which was 9.5% during 2013-14,
has come down quite significantly during 2014-15 to 6.4%. This is certainly a
positive development and credit must be given to the Reserve Bank of India for
achieving this.
It is now well-known that India’s
premier statistical agency, the Central Statistical Organisation (CSO), starting
from the base year of 2011-12, changed the methodology it employed to measure the
GDP. This has meant that GDP data prior to 2011-12 cannot, at the moment, be
compared to data from 2011-12 onwards. The CSO will have to convert all GDP data
prior to 2011-12 to the new base year for long term comparisons to be possible.
Fortunately, no such problem bedevils the comparison of 2014-15 with 2013-14.
The CSO reports GDP data in two forms:[i]
- Gross Value Added (GVA) at basic prices. This is similar, but not equal to, GDP at factor cost that used to be reported before the change in methodology. Data for sectors of the economy, such as agriculture, mining, manufacturing, services, etc., will now only be in terms of GVA.
- GDP at market prices.
Even though the new methodology
of the CSO is in line with world practices, as pointed out by Arvind Panagariya
(Chairman, NITI Ayog), some aspects of it have left even Arvind Subramanian
(Chief Economic Advisor) and Raghuram Rajan (RBI Governor) confused.[ii]
Given these preliminaries, as
well as some caveats about the new methodology adopted by the CSO, what does
the GDP data tell us about the performance of the economy? Figure 1 gives
quarterly growth rates for 2013-14 and 2014-15 as well as growth rate for the
entire year.
By and large the line for 2014-15
lies completely above that for 2013-14. However, for the whole year, the rate
of growth for 2014-15 at 7.29% was only about 0.40 units greater than the rate
for 2013-14 (6.90%) which was possibly the worst year of the UPA government.
Does this increase in 2015-16 represent a trend? For 2015-16, the Finance
Ministry expects the rate of growth to be as high as 8% to 8.5%, the RBI
expects it to be 7.8%[iii]
and the IMF expects it to be 7.5%.[iv]
Where do I stand on this? My feeling is that the rate will be less than 8%,
probably closer to 7.5%. I will elaborate on my reasons below.
Let us now look at the various
sectors of the Indian economy. We first look at agriculture in Figure 2:
This sector has performed
substantially worse in 2014-15 as compared to 2013-14. One important reason for
this was that rainfall was only 88% of the long run average.[v]
Barring Q1, every subsequent quarter saw massive decline as compared to 2013-14.
Since agriculture accounts for over 16% of GVA, a problem with this sector does
affect the overall rate of growth.
Manufacturing shows a much improved
performance though there have been dips below the rate seen in 2013-14. See
Figure 3.
Finally, the services sector,
which has driven growth over the last few years, performed well in 2014-15. See
Figure 4.
Is there enough in the growth
rates that we have seen so far to suggest that India has escaped the low growth
trap of UPA’s last year? Barring agriculture, there does seem to be improvement
in the economy but it does not seem to be high enough to be put India on a high
growth trajectory. I will reserve my judgment about 2015-16 for some more time.
One other way of looking at the
performance of an economy is from the side of demand. Whatever is produced in
the economy must be purchased by various segments of the economy or else it
would result in unsold stocks leading to production being adjusted downwards at
the next production cycle. Hence, total production in the economy i.e. GDP,
should equal total demand for goods and services. Specifically,
GDP =
Demand by private
individuals (Private Final Consumption Expenditure in Fig. 5)
+ Demand by government (Government Final Consumption Expenditure in Fig.
6)
+
Demand for investment goods in the economy (Gross Fixed Capital
Formation in Fig. 7)
+ Demand from rest of the world (Exports in Figure 8)[vi]
Any shortfall in the various
kinds of demands in the above expression has a tendency to pull down the GDP.
Figure 6, dealing with private demand, shows no particular trend and the rate
of growth for the whole year is more or less equal in 2013-14 and 2014-15. This
is disconcerting since private demand is a major driver of GDP accounting for
57% of total demand in 2014-15 which has fallen marginally from 58% in 2013-14.
Boost in private demand is especially important since the government has been trying
hard to reduce government expenditure (which affects demand by government) in
its efforts to reduce fiscal deficits.
Figure 6 shows a massive fall in
government demand of almost -8% in the fourth quarter as the government tried
to meet its deficits targets for 2014-15. For the year as whole, the rate of
growth was 6.6% in 2014-15 as compared to 8.16% in 2013-14. By itself, this lower
rate of growth is welcome since it improves government finances. However, when
the government lowers its demand, other sectors must make up for this void.
That does not seem to be happening.
One of the major accomplishments
of the NDA government was to restore the confidence of the business sector
though the magic seems to be waning one year into its rule.[vii]
One indicator of improving business confidence would be investments in fixed
assets (gross fixed capital formation in Figure 7). In terms of growth rate,
the rate in 2014-15 at 4.65% is higher than the rate of 2.95% achieved in
2013-14. The question is whether a rate of 4.65% is good enough to boost
production in the months to come. The disappointing part of the investment
story is that the share of gross fixed capital formation in GDP is lower in
2014-15 (10.88%) as compared to 2013-14 (10.95%). If at all, the level of 2013-14
has been maintained but it does not seem anywhere enough to give a boost to the
rate of growth of the economy in 2015-16.
The most disturbing picture,
however, is that of exports (Figure 8). After registering a rate of 9.13% in Q1
of 2014-15, in every subsequent quarter, the rate of growth has been negative. For
the entire year, the rate of growth was -0.76% as compared to 7.28% in 2013-14.
This performance is especially dismal if we recognize that in 2014-15 the USA
(a major market for Indian exports) was doing much better than in 2013-14.
The broad conclusion to emerge
from the analysis so far is that, by and large, there has been an improvement
in the performance of the economy in 2014-15 as compared to 2013-14. However, I
have my doubts whether this improvement is significant enough to push the rate
of growth to 8% or higher in 2015-16.
Looking to the Future
Having completed the first
quarter of 2015-16, is it possible to anticipate how the economy might perform
over the entire year? I am going to list out a set of indicators which provide
some guidance in this task.
Purchasing Managers’ Index (PMI):[viii]
PMI data have been known to be very useful in some of the industrialised
countries for the purpose of predicting production. Its usefulness for India is
still being debated. Bhattacharya and others[ix]
put forward a skeptical view while Bose[x]
finds the PMI useful in forecasting production. The PMI is based on a survey of
purchasing executives in Indian companies.[xi]
The magic number for PMI is 50. If the value of PMI is more than 50, an
expansion in the economy is indicated while a value below 50 signals a
contraction. Figure 9 below shows the PMI for India.
There has been a steady increase
in PMI as compared to 2013-14 and it has remained above the critical value of
50. This should indicate an increase in business confidence and point towards
an expansion for the future.
Non-food Bank Credit: One other factor determining business
confidence and, hence, contributing to growth is non-food credit (NFC) by banks
which is the lending that banks carry out to the industry. An expansion in the
NFC is expected to precede increase in production. Figure 10 shows the state of
NFC growth.
The data in Figure 10 shows that
the NFC growth rate in 2014-15 has been continuously declining. Clearly, the
information conveyed by Figure 9 and Figure 10 seems contradictory. Figure 9
suggests increasing business confidence which should have been reflected in
greater demand for NFC but that does not seem to be happening as per Figure 10.
Which is the better indicator of future growth? PMI or NFC? Being an economist,
I would rather believe hard data (as shown in Figure 10) and be skeptical about
survey data (on which PMI is based) since it is likely to be coloured by
inaccurate responses due to biases and other noise.
Index of Industrial Production (IIP): This is the only information
about production that is available on a monthly basis in India. However,
information conveyed by IIP is not perfect and is subject to much revision. Figure
11 gives the path of IIP growth rates.
After attaining a high 5.2% in
November 2014, the performance of IIP has been quite poor with declining growth
rates. The data for the last three months, from March-May 2015, has been
especially disappointing. There seems to be no obvious momentum that is
discernible which is likely to push the IIP up in the near future. It is true
that IIP covers only the industrial component of the GDP (excluding entirely
the agriculture and services sector) but such a poor performance does point
towards problems later in 2015-16.
Other Factors: Earlier in this note I had highlighted some other
factors which do not seem to augur well for the future. I will merely list
these without going into more details:
- Exports: The performance of exports has been extremely worrisome. Will this change in the coming months? With Europe continuing to be in doldrums and China showing uncharacteristic weakness, the prospects for the world economy and, hence, Indian exports, do not seem bright.
- Private Demand: Compulsions of keeping fiscal deficit under control will mean that government demand (Figure 6 above) will remain depressed. This reduction in government demand has to be compensated by private demand (Figure 5 above). However, that does not seem to be happening and this will act as further dampener to the growth prospects in the coming months.
Taking into consideration some of
the factors that act as (leading and coincident) indicators of GDP growth, I am
unable to be very optimistic. At the beginning of this write-up, I had
expressed some skepticism at the high rate of growth of 8%-8.5% put forward by
the Finance Ministry. The various indicators that I have looked at lead me to
believe that rate of growth of the Indian economy will, at best, be close to
what we have already seen in 2014-15, that is, a rate of about 7.5%.
Sources of Data:
- Most of the GDP data have been obtained from the Reserve Bank of India database (www.rbi.org.in)
- IIP and CPI data are from Ministry of Statistics and Programme Implementation (http://mospi.nic.in/Mospi_New/site/Home.aspx).
- PMI data from http://www.markiteconomics.com/Public/Page.mvc/AboutPMIData
[i] http://www.mospi.nic.in/mospi_new/upload/nad_press_release_30jan15.pdf
[ii] http://www.ndtv.com/india-news/new-gdp-numbers-based-on-scientific-methodology-niti-aayog-vice-chairman-arvind-panagariya-778355
[iii] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=34073
[iv] http://profit.ndtv.com/news/economy/article-india-to-clock-7-5-growth-in-2015-16-overtake-china-imf-754962
[v]
Economic Survey 2014-15, p. 18
[vi] In
fact, this should be Net Exports = Exports – Imports
[vii] http://www.livemint.com/Money/BrkZyAZ3VzeO5Vlzzy3hDN/Is-the-Modi-magic-over-as-business-confidence-falls.html
[viii]
http://www.markiteconomics.com/Public/Page.mvc/AboutPMIData
[ix] https://macrofinance.nipfp.org.in/PDF/02_Pr_Pandey_nowcasting.pdf
[x] http://www.icra.in/Files/MoneyFinance/suchismita%20bose.pdf
[xi]
See http://www.markiteconomics.com/Public/Page.mvc/AboutPMIData
for more information on PMI data
