India’s growth statistics have been in the news for a variety of reasons. They are also topical. The Central Statistics Office (CSO) released the first growth estimate for 2013-14 on February 7. The economy will grow by 4.9 per cent, a tad higher than what the markets were expecting but below the 5 per cent which the government was hoping at the very minimum.
But much of the action leading to the latest data release occurred a week before.
On January 31, the CSO revised its gross domestic product (GDP) growth estimates for three previous years — 2010-11, 2011-12 and 2012-13. The significance of the revisions just a week before the first growth estimate for the current year should not be lost sight of. A revision in any particular year affects the data for the next year. GDP figures, like other important macro-economic numbers, are on a year-on-year basis, that is, the rate of increase or decrease over a comparable period last year.
This, as we shall see below, opens up possibilities for not only analysing the revisions but for cynical exploitation by politicians and policy-makers to suit their own ends.
This is possible because of the base effect. A weak growth such as the 4.5 per cent for last year becomes the base for that year, and, therefore, the figures for the current year get a degree of lift that is entirely statistical in nature.
What are the revisions and their implications?
For 2010-11, the GDP growth, estimated at 9.3 per cent, has been revised downwards to 8.9 per cent. For 2011-12, the change has gone the other way.
From the originally estimated 6.2 per cent, it has been raised to 6.7 per cent. The change is attributed to the fact that the more reliable figures from the Annual Survey of Industries have replaced the Index of Industrial Production (IIP). The IIP has been notoriously inconsistent and volatile and, according to no less than the then Reserve Bank of India (RBI) Governor, Subbarao, has limited utility in the framing of macro policies, including the monetary policy. But the question is whether such substitutions will always be positive — that is push up the rate and not bring it down?
Most relevant to our discussion is revision made by the CSO to its 2012-13 GDP numbers. Against the earlier projection of a 5 per cent growth, the economy is now seen to have grown by just 4.5 per cent, which is the lowest for any quarter in a decade.
When the CSO first projected a 5 per cent growth for 2012-13 (in its advance estimate) exactly a year ago, the Finance Minister and many senior officials had faulted the CSO’s methodology, and maintained that the 5 per cent rate grossly underestimated India’s growth and that the actual rate would be between 5. 5 per cent and 5.7 per cent. In the event, the revised rate at 4.5 per cent has not been faulted. The low and favourable base gives the economy a chance to touch 5 per cent in 2013-14, which, in popular thinking, is tolerable though not flattering.
Revisions, especially of statistics relating to national income and inflation, are not uncommon. The procedure for releasing the data is long, and goes through four revisions after the advance estimate. In a vast country with several data points, collating data relating to the macro-economy is by no means easy. It is incumbent upon the official statistician to not only ensure accuracy of data but also provide a rational explanation for the revision.
Quite obviously it is the performance of several individual sectors that add up to the GDP estimation. The revised (lower) GDP growth figure for last year (2012-13) of 4.5 per cent (down from 5 per cent) is due to the following:
Agriculture is now estimated lower at 1.4 per cent (1.8 per cent earlier). Much more spectacular are the downward revisions in mining from 0.4 per cent to minus 2.2 per cent, and in construction from 5.91 per cent to minus 1.1 per cent.
While financial services were one of the few sectors whose growth rate was revised upwards, the sub-sector community services was revised to 5.3 per cent from 6.8 per cent earlier. This sector is a proxy for government spending. The government’s efforts at cutting down expenditure to keep the fiscal deficit within 4.8 per cent of GDP are seen here.
The slower rate of growth is reflected in yet another crucial variable. Gross domestic savings as a percentage of GDP has come down from 31.3 per cent in 2011-12 to 30.3 per cent during 2012-13. This is attributed to lower savings by household on physical assets. The rate of investment also declined to 34.8 per cent in 2012-13 from 35.5 per cent in the previous year.
How all these have influenced the (first) advance estimate for the current year 2013-14 will make for a fascinating study.