India’s growth story: Nothing is how it looks

No, I am not raising questions about how India’s national accounts are estimated. The real juice of India’s latest growth numbers lies in its details, something easy to overlook given the overall numbers.

The first growth reading for 2016-17 was out last week. In Q1, 2016-17, India’s growth was hardly anything to write home about. Normally, it would be chalked up as a routine national accounts report with nothing but the most predictable details to be etched out. Except that it was not. There is a lot more to this reading than what meets the eye at first glance.

As the first news feeds on the growth report trickled in, the headlines read, ‘India’s growth falls to lowest in 6 quarters of 7.1%’ or some variation of that. That headline sure sounds disappointing, except for one detail: It is misleading. Ever since the Central Statistical Organisation (CSO) started publishing growth numbers with the new base of 2011-12 and with methodological changes along with it, it has also made a distinction between Gross Domestic Product (GDP) and Gross Value Added (GVA) for greater accuracy in terminology.

While GDP, which is measured at market prices, is measured from the expenditure side; GVA is measured at basic price, which is GDP at market prices net of net indirect taxes. Earlier, GDP was a blanket term used for national accounts report, where GDP at factor cost was represented as the cumulative value add by economic activity and GDP at market prices represented measurement by the expenditure method.

The accepted headline growth measure is that measured by economic activity at factor cost. Earlier this was GDP at factor cost, now it is termed as GVA at basic prices. Partly because the change in terminology still seems to be confusing to some, and partly because the CSO press release itself also regularly mentions India’s GDP at market prices growth in its opening line followed by growth in GVA at basic prices, for some reason. As a result 7.1% was picked up as the headline growth number, the lowest in one and a half years. Strictly speaking, this figure is not wrong. But it is not right either.

GVA at basic price grew by 7.3%, which is actually a marginal increase over the previous quarter’s growth rate. It is not a big difference, so the numbers are nothing to shout from the rooftops about, but they are not the lowest in 6 quarter either. Therefore, it follows, that they are nothing to get despondent over either.

A second, relatively unexpected, change to the growth report is the growth rates by components. As a result, the growth drivers have shown some change. We compare the latest quarter’s growth numbers with those of the previous quarter and those of the corresponding period of the previous year. Both agriculture and industry growth were lower by a margin from the rates seen in the 2 comparable periods. Growth in agriculture slipped below 2% to 1.8%, compared to 2.3% in Q4, 2015-16 and 2.5% in Q1, 2015-16. Growth in industry slipped to a mere 6%, down from an impressive show of 7.9% during Q4, 2015-16 and far healthier 6.7% in Q1, 2015-16. Services on the other hand, have seen a spike in growth to 9.6% from 8.7% in Q4, 2015-16 and 8.8% in Q1, 2015-16. 
It is not surprising therefore, that the contribution of the services segment to economic growth jumped to 70% during the quarter, up from 64.5% during the corresponding period of the previous year. Industry’s contribution to growth, commensurately declined to a 26.4% from 30.2% one year ago and agriculture’s contribution declined to 3.6% from an already small 5.3% at the same time last year.

And that is not all, with respect to reading the fine print. While the monthly index of industrial production (IIP) numbers indicate beyond doubt that India’s industry is still in a recession, it would be a mistake to assume the same being reflected in the sub-parts of industry.  The drag on industry came only on account of a decline in ‘Mining and quarrying’ value added during the quarter by 0.4%, even though growth in both ‘Manufacturing’ and utilities segment continued to show strong growth.

On the expenditure side, by the looks of it consumption spends are showing healthy growth. But there is a catch here too. Total consumption expenditure growth has accelerated for 5 consecutive quarters now, attaining a 12 quarter high of 8.7% in Q1, 2016-17. But a look at the detail of the consumption expenditure fine print does not suggest an overall pickup in spends. In fact, private final consumption expenditure, which accounts for 55% of the GDP, actually showed a growth deceleration to a 5 quarter low of 6.7%. The growth spike came from a sharp improvement in government expenditure to 18.8%, a 6 quarter high, even though the component accounts for only 12% of the GDP. That a pickup in government spends will have a further multiplier effect on economic growth cannot be discounted, but at present, a broader pickup in consumption spending is not visible.

In sum therefore, even though the latest growth story looks indifferent on the surface, a number of interesting trends are visible once the surface is scratched. These stem from a change in growth drivers to less obvious categories. As a result, a dip in industrial growth isn’t as bad as it appears on first sight, and a sharp pickup in consumption spends is not as robust as it first appears. It will be even more interesting to look out for how far these trends can be sustained, because if they are, we are looking at different angle for viewing India’s growth picture.

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