Introduction
With the latest GDP estimates surprising the market, analysts have
suddenly noticed that there is such a thing as discrepancy. Based on this, a
wide range of completely desperate conclusions are being drawn about GDP
growth. Estimates of 5% to 8% are being bandied around. The hoary issue of new
versus old system of GDP measurement has again been dis-interred. This note
tries to clarify the new issues raised.[i]
GDP Measurement
GDP is estimated from supply side by aggregating the vale added in
different sectors such as Agriculture manufacturing(nanf), electrcity (elec)
and construction(const) and from Demand Side by aggregating private
consumption(C), government consumption (G), total investment (I)and exports
(X) minus imports(M). The difference
between the two estimates is shown as a discrepancy(Disc). Mathematically these
can be represented as,
Supply side estimate of GDP = GVA + Tax
-Subs
= GVA (Agri + Manf + elec +
Const+...) + (Tax - Subs)
where Tax = Producer Taxes and Subs =
Producer Subsidy.
Demand Side estimate of GDP= C+G + I
+(X-M)
Discrepancy = GDP (demand side) - GDP (supply side)
The data basis for supply side estimation
is historically better, in India, than for demand side estimates, so the
discrepancy is shown in the demand side estimates. Over the past four years 2012-13 to 2015-16
the average growth of GDP ( in constant 2011-12 prices) as measured by the
supply side has been 6.8% per annum, 0.5% point faster than GDP growth of 6.3% measured by the demand side. In contrast the average growth in nominal
terms is an identical 11.7% from both supply and demand sides. Thus the difference in real growth rates is
entirely due to the 0.5% difference in the price deflators: The supply side
price deflator (inflation) has averaged 4.6%, while the demand side deflator
has averaged a higher 5.1%. As the
difference in inflation is the largest in 2015-16 (3.7% - 1.1% = 2.6%) the real
growth differential is also the highest in 2015-16 (5.2% - 7.6% = - 2.4%
).
In 2015-16 real GDP as measured from demand side has grown by 2.4%
points slower than the real GDP as measured from supply side, because inflation
(deflator) as estimated from the demand side is 2.6% points higher than the
inflation (deflator) as measured from supply side. Thus a majority
of the producer sectors of the Indian economy were characterized by deflation
ranging from -1.1% to -2.6%. In contrast
consumption demand (private & public) was characterized by positive
inflation ranging from 3.1% to 4.5%, with only investment and external trade
(Import & export) showing deflation.
For
those inclined to blame everything on the change from old method to new method,
the following comparison is useful: The discrepancies in current prices in the
new accounts for 2011-12, were only 0.72, of the errors and omissions in the
old accounts. The numbers for 2012-3 and 2013-4 (0.08 and 0.04 respectively)
possibly because the revisions to the old accounts became redundant with the
arrival of new ones.
The
UN-IMF system of GDP accounting was devised during a period of positive
inflation, when few thought 90% of World could face deflation in several parts
of the economy and for periods ranging to year or more. In normal times various
indicators of inflation diverge temporarily and converge either on annual basis
or even on a moving average basis. This was the case in India for the Wholesale
price index and the different indicators of CPI. Since the Global financial,
the latter along with the new CPI index, have diverged progressively from the WPI
(even adjusted for different weights) and shows no signs of converging. These
divergences have translated into divergences in the deflators for different
sectors and demand components. This methodological problem is probably most
acute in transition from inflation to deflation and the reverse. I would
hypothesize that the inflation-deflation dynamics is likely one reason for the
increasing gaps.
Quarterly Data
When we move from Annual GDP to Quarterly GDP the data basis is even
weaker as much data is available (minimum acceptable quality) only on annual
basis. Quarterly data is useful for judging trends in different components on
the supply side and the demand side, though the
latter are even poorer than in the annual data. The quarterly trends for GDP & components
are most useful when FY Q2 & Q3 data becomes available, least for Q4 (as
full FY available). This is partly because the UN-IMF NAS/ GDP methodology that
we follow, has technical rules for certain estimates in quarterly acts which r
confusing even to users. These are pragmatic rules of thumb based on
historical experience.
Analysts have made too much of a deal of GDP
growth in the fourth quarter: Both the 7.9% growth shown by the supply side and
the 5.4% growth shown by the demand side.
More significantly the quarterly
data show that during the second year of drought, private consumption maintains
it slow but steady recovery, while gross fixed investment remains on a
downtrend with large quarterly fluctuations.
Conclusion
The annual data for 2015-16 confirms the
estimate of 7.6% GDP growth that the CSO had estimated in February 2016. This strengthens the confidence I have in the
forecast I made at end-march 2016, before the forecasts of the monsoon appeared (based on the history of consecutive droughts). [ii] To summarixe:
(1)
That GDP growth in 2016-17 will accelerate to between
7.8% and 8.1%.
(2)
Growth
will be much more evenly distributed than in the past two years, with
both the agricultural sector and the large corporate sector accelerating more
than the rest of the economy.
-----------------
A version of this article appeared on the Op Ed page of the Indian
Express dated 13th June, 2016 under the banner, "Gross Domestic Perplexity".
http://indianexpress.com/article/opinion/columns/gross-domestic-product-inflation-indian-economy-growth-variations-column-2849408/ .
[i] For the old one see http://dravirmani.blogspot.in/2015/09/indian-economic-growth-post-gfc.html
[ii] http://dravirmani.blogspot.in/2016/04/growth-inflation-and-monetary-policy.html
No comments:
Post a Comment