Is The New GDP Series In Sync With Other Economic Indicators?

New data on India’s gross domestic product has left economists scrambling to make sense of what the recently released statistics say about broader economic trends.

India’s statistical office shifted to a new GDP series, with a base year of 2011-12, in 2015. The new series is believed to be superior to the old series as it incorporates a far wider set of data points. However, until this week, there was no data available for growth trends before 2012-13 as per the new series, leaving a niggling question of what the economy looked like in previous years.

The back-data was finally released this week and threw up a few notable changes, which, in turn, have drawn controversy.

• Average economic growth between 2006-07 and 2011-12 fell from 8 percent under the old series to 6.7 percent under the new series.
• Under the new series, average economic growth between 2012-13 and 2017-18 stands at 6.9 percent.
• The new series suggests lower peak growth rates for the Indian economy. For instance, in 2010-11, GDP growth stood at 10.26 percent under the old series. Under the new series, the growth rate for that year was revised lower to 8.5 percent.

“Change in methodology, use of latest survey results, use of new, more regular and reliable data sources and improvement in coverage are the major reasons for the differences between the old series and the new series,” said Chief Statistician Pravin Srivastava after the release of the report.

The question being raised after the release of the data is whether the new GDP series is in sync with other available economic indicators such as investment trends, bank credit growth and tax collections, among others.

Bank Credit Vs GDP Growth

Take, for instance, bank credit growth, which typically gives a reasonable sense of the economic activity.

Between 2006-07 and 2011-12, average growth in bank credit stood at 20.3 percent. Between 2012-13 and 2017-18, average growth fell to 12.3 percent. Yet, the GDP growth in the 2006-07 to 2011-12 period was slower than in the period between 2012-13 and 2017-18.

Soumyakanti Ghosh, chief economist at State Bank of India asks whether this means that capital is now more efficient? “Does it mean that the link between the bank credit and GDP has weakened over the years as banks have started accommodating companies through other sources like commercial paper and bonds,” Ghosh asked in a report released on Thursday.

This disconnect is because of a difference in data sources and will continue, said TCA Anant, former chief statistician of India. There is a difference when GDP is computed when full accounting data is available and how it is estimated in the early quarterly and advanced estimates, he explained. In earlier stages, GVA in the financial sector is linked to credit growth but once full accounting data is available, GVA is computed using this data, he adds.

Investment Growth Vs GDP Growth

A glance at the investment growth, as measured by the expenditure side of National Income, also throws up an inconsistency.

Gross fixed capital formation grew by an average of 10.7 percent from 2006-07 to 2011-12. It grew at half this pace of 5.3 percent in the following six years. But once again, GDP growth was printing higher in the latter period.

However, this may be partly explained by rising economic efficiency, explained Ghosh of SBI. The general belief is that rising economic efficiency has led to a lower Incremental Capital Output Ratio. The ICOR assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production.

As such, growth in more recent years may have been generated using lower amounts of investment capital.

The relation between investment and output is not uniform across the business cycle, said TCA Anant. He explained that in a business cycle, investment picks up only in the latter half. The first half of the cycle is consumption driven. “Growth first revives on the basis of consumption and later runs out of steam because of excessive investment and capacity creation. Hence, investment cycles and output cycles are often on different phases,” he said.

Growth In Tax Collections Vs GDP Growth

Tax collections, empirically proven to correlate well with GDP growth, also show conflicting trends.

Tax collections grew at 16.5 percent from 2006-07 and moderated to 13.8 percent for the same duration after 2012-13. This is contrary to the GDP growth trend over these two periods.

To be sure, any changes in tax rates or higher compliance would have a bearing on the growth in tax collections over and above GDP growth.

GDP Growth Vs Inflation

Higher economic growth rates, particularly those well above potential growth, tend to drive up inflation. If you reverse that argument, high levels of inflation, barring supply side shocks, can suggest elevated demand levels in the economy.

Between 2006-07 and 2011-12, average retail inflation was at 9.6 percent, shows data collated by SBI Economic Research. Over the next six years, inflation averaged 6.4 percent despite higher growth.

To be sure, structural changes such as lower increases in support prices could pull down headline inflation even if core inflation, led by demand, is high.

The back data poses reconciliation problems regarding micro and macro data interpretation, said Ghosh in his report while adding that data needs careful studied.

One implication of the new data series is on estimates of potential growth, said the treasury economic research group at HDFC Bank Ltd.

“The maximum growth rate the economy achieved since 2004-05 now stands at 8.5 percent for 2010-11, lower than the 10.3 percent figure estimated earlier. This could suggest that the long-term potential growth rate for India might be lower than what was perceived earlier,” said the HDFC Bank report released on Friday.