Households said to be saving less in physical assets
All revisions of the base year cause the indices to change, and it has been well-documented that India’s GDP data does not capture large parts of the economy. Indeed, there has been a case for frequent base revision so as to capture the structural changes in the economy as well for incorporating more reliable as well as high-frequency data such as company filings to the authorities as well as tax payments data. This is what the new GDP data seeks to do, and to that extent, this is a job well done. But the data needs to be digested carefully, and perhaps needs to be revalidated since no change in base—from FY05, the base year has been changed to FY12—can cause the kind of change the latest numbers have thrown up. From another year of stagnation at a 4.7% GDP for FY14, the new series suddenly throws up a growth of 6.9%. If this were true, it is not clear why the voters were so blind they never saw the huge turnaround brought about by the Manmohan Singh government in its last year—voters, in fact, seem to have voted out UPA-II on the incorrect premise that it had brought the economy to its knees.
While it is good the data will now be comparable with international ones—no other country reports GDP series in the manner India does— it has to square up with other data as well. If the share of manufacturing has shot up 12.9% to 17.3%—and industry from 24.7% to 30.7%—this should have been accompanied by a sharp surge in jobs, not the kind of growth that has been seen over the last few years. Part of the jump has taken place due to the surge in mining, from minus 1.4% in the old series to 5.4% in the new one for FY14. The negative number squared with the ban on mining by various courts, the new one does not. Equally, it seemed possible to square the collapse in mining with the stagnation in sales of commercial vehicles; if mining has rallied in the manner it has, why didn’t CV sales pick up? And all production has to be financed, as does new investment—in this case, neither seems to have happened. Going by the new series of GDP data, industry did not grow by 0.4% but grew by 4.4%; similarly, gross capital formation actually rose 3% in FY14 according to the new series instead of falling 0.3% based on the old series. Yet, through all of this, bank credit grew only 15%, an oddity. Indeed, with the increased GDP numbers, the share of investments has fallen significantly, from 36% of GDP under the old series for FY14 to 33.4%; while the fall is worrying, the jump in GDP growth rate means the productivity of capital has jumped dramatically—there is really no explanation in the data for why this should have taken place, more so given all the problems with infrastructure bottlenecks, stuck projects and lack of coal and gas, etc. Nor is there any explanation for the complete U-turn in household savings—while conventional wisdom, of RBI and others, was that households were saving more in physical form (gold, etc) due to high inflation, the latest GDP data says “the decline (in the share of the household sector in total savings) can be attributed to the decline in household savings in physical assets”. The next time a base rate change is done, it would be a good idea to have detailed workshops explaining what has happened.