Whither the Economy

Tulsi Jayakumar

Author: Tulsi Jayakumar

Date: Wed, 2016-09-21 13:40

Three reports coming in the last week, two from the government and one from the RBI have reminded us of the problems of reconciliation of macroeconomic data put out by different agencies regarding the direction of the economy.

The RBI, on Sept 10, 2016 released its monthly bulletin for September 2016, while the government on September 12 released its Quick Estimates of the Index of Industrial production (IIP) for July 2016, as also its estimates for GDP for the first quarter (April-June) 2016-17.

The Quick Estimates of IIP present a damning picture of industrial growth, despite the government’s clarion call for ‘Make in India’. The General Index is 2.4 percent lower compared to its level in the previous year, while its cumulative growth for the period April-July 2016 on year was (-) 0.2%. More importantly, it was the manufacturing sector that seemed to have exhibited the worst performance, with a (-) 3.4 percent growth rate compared to July 2015. The industry groups ‘Electrical machinery and apparatus’ and ‘Medical, precision and optical instruments, watches and clocks’ exhibited large negative growths of (-) 59.2 and (-) 16.8 per cent respectively.

Use-based classification confirmed this picture of (-) 29.6 per cent growth of capital goods, with high negative contributors being rubber insulated cables; marble tiles and slabs; HR sheets; sugar machinery; sealed compressors and rice.

Compare this picture with the GDP growth numbers put out by the government on August 31, 2016. Voila, magic! The manufacturing growth numbers for April-June 2016 seem to be a robust 9.1 per cent compared to 7.3 per cent in the previous year. Electrical, gas, water supply and utility services have done even better- more than doubling the growth rates from 4 to 9.4 per cent for the same period.

How does one reconcile these two contradictory positions put out by one body alone? The differences in the base year for the two reports may explain part of the problem. The IIP with 2004-05 as the base year, together with the basket of goods comprising it may not provide a true picture of the manufacturing sector output today. The GDP series, with its 2011-12 base year therefore may be appear to be a better reflector of what really is happening on ground.

How does the RBI Monthly Bulletin tie up with all this? The Bulletin contains results of two surveys conducted by the RBI on a quarterly basis – the ‘Order Books, Inventories and Capacity Utilisation Survey (OBICUS)’ and the ‘Consumer Confidence Survey’. It is movements in these, reflecting to an extent business and consumer sentiments, which may be a better predictor of things to come.

The findings from the OBICUS point to the fact that the growth in average new orders of sample companies was only marginally positive till Q3 2015-16, but it contracted in Q4. There was no significant accumulation to the inventory levels of sample companies during 2015-16. At the same time, the level of capacity utilisation continued to be low in the Indian manufacturing industry in 2015-16. All these reflect a lower business confidence.

The Consumer Confidence Survey captures sentiments on economic conditions- both the current situation compared to the previous year, as also the expectations for the year ahead. The current situation as also the future expectation indices declined during the first half of 2015-16, but improved thereafter. This is not surprising, given the expected salary increases on account of the Seventh Pay Commission bounties, as also the One Rank One Pension Scheme (OROP), the good monsoon predictions, as also the taming of food prices. However, such improved sentiments carry the danger of stoking food, and even more so, service price inflation.

It then appears that the government will need to take further steps to revive stalled projects and improve business sentiments to enhance private investment. More importantly, there should be better coordination between various agencies to ensure that the multiple indicators put out by them match up to provide a single, homogenous picture of the state of the economy.


Originally published in The Free Press Journal on September 20, 2016

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This article is extremely insightful in terms of highlighting the disconnect between the various statistical agencies of the Union government. It is appalling to note that two authorities under the same administrative set up can come up with such a wide gap in economic parameters. Your point on the coordination between the various agencies is well taken. The two numbers- the Index of Industrial Production (IIP) and the GDP estimates are computed by using data points generated by different sample surveys conducted across the length and breadth of the country. Some disparity is bound to be present in the results. What about the gaping differences? They certainly cannot be large enough for the authenticity of the findings to be questioned. However, encouraging convergence at the cost of independence and good faith will cost the economy more than the cost of having differences (and not inconsistencies) in the numbers. Both these figures- the IIP and the GDP are based on the estimated outputs of eight core industries. It is but natural that these industries have performed very differently in the two different base years. It would be a good idea if the statistical authority could reconcile these differences post facto, to allay any fears of inaccuracy. These differences in the economic indicators computed by the very same statistical authority point out to a larger and more serious issue at hand. How relevant is the Gross Domestic Product as a barometer for economic progress? For a country which takes pride in even trying to become a welfare state, this question is more relevant. Economists spend so much time thinking about how to accelerate the growth in the economy. However, the concept of GDP completely ignores factors of well-being such as leisure, time, income equality, social inclusion, political freedom, environmental factors etc. GDP as a concept itself was introduced for planning the defense outlays in the Second World War. It is intriguing to see that a tool used to plan for war effort has now become a yardstick for economic status, even well-being in per capita terms. I believe that the time has now come to look at alternatives for assessment of the true economic status of a country. As per the World Bank, India has a GDP of about 2.26 trillion dollars at current market prices. That is a huge economy! But if one looks at the status of poverty, these numbers fall like a pack of cards. One in every five Indians is poor, rather destitute enough to not even have a basic level of calorific intake of food. It is not surprising that India does not even have a headline figure for unemployment! Without even going into the merits of the accuracy and reliability of the numbers of the GDP and IIP, I believe that the time has now come for economists to start looking at the relevance of these two numbers as well. Do I have a solution? Well unfortunately I don’t. GINI and HDI are some baby steps taken in this direction, but there is plenty of work to be done!

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