Saturday, January 31, 2015

India's new GDP series (base 2011-12)

Past Data

  When constant price GDP is re-based we need 5-10 years of backward data to determine growth trends as per new series. This is because all growth rates will change (in principle). It is impossible to make judgements of trends with only 2-3 years of data. Thus it is going to be very difficult to predict likely GDP at 2011-12 prices(new series) for 2014-15 or to make projections for 2015-16.
     Certain analysts in the media have taken the two new growth rates available for the new series and combined them with growth rates for earlier years from the old series to produce five or ten year averages. This is not only technically incorrect but can produce completely wrong results (for past real average growth rates). The DOS must produce the back series, as they have always done in the past. Such back series are never perfectly consistent with the new series because of less data, but are much better than using the old series for earlier years (spliced or otherwise).
    Two short term conclusions can however be made from the growth data for two years. There seems to be the start of a recovery in Private Consumption Expenditure(PFCE) and in Fixed Capital Formation(GFCF). If these are confirmed in the 2014-15 data, to be published shortly (February 9th ), this will confirm that we have passed the trough of the investment cycle and are firmly on the path to recovery.
    Incidentally there is little change in the nominal value of GDP for the last two years for which data has been made available. Consequently ratios, such as Fiscal deficit and Revenue deficit (as a per cent of GDP) are highly unlikely to change (ie changes will come within the rounding error).

Advance Data(PS 9/2/15)

 The advance data for 2014-15 came in on February 9, 2015 as expected. These data show an increase in the growth rate of Gross Value Added at basic prices (GVA) by 0.9 per cent point. The GVA is the equivalent of what was earlier called GDP at Factor Cost. In my post-budget forecast in July 2014, I had projected that GDP FC would grow approximately 1% point faster in 2014-15 than in 2013-14.  A few months ago, one had suggested that the delay in monetary easing by RBI, despite the dramatic downtrend  in inflation, would likely result in under shooting of this target. Thus a 0.9% point increase in the growth of GVA confirms our prediction, despite the re basing of the GDP to 2011-12.
     The advance data also confirm the revival of both private consumption and fixed investment. Thus Private Fixed Consumption expenditures (PFCE) growth has acelerated to 7.1% in 2014-15 from 6.2% in 2013-14. similarly the growth of Gross Fixed Capital Formation (GFCF) has accelerated to 4.1% from 3.2%. Thus one can be reasonably confident that the investment cycle has bottomed 2012-13 and is now firmly on the upswing.
   The third point to note is that inflation trend has clearly reversed. The most widely used and accurate measure of inflation globally is the private consuption price deflator. This shows a dramatic decline in inflation rate to 5.4% in 2014-15 from 8.5% in 2013-14 (and 9.4% in 2012-13). 
  The fourth noteworthy point is that Govt consumption growth has accelerated further in real terms from 8.2% in 2013-14 to 10% in 2014-15. This highlights the urgent need for fiscal consolidation through a reduction in the revenue deficit that will make space for funds to be transferred to  govt investment.

Forecast for 2015-16

 In my post budget review I had forecast a further increase in the growth rate by 0.5% to 1% point in 2015-16 above the growth rate in 2014-15. Given the new GDP series and the focus on what used to be termed GDP MP, I know expect GDP growth to accelerate by 0.5% to 0.75% point above the final 2014-15 number. 


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