After the Prime Minister’s Economic Advisory Council (PMEAC) made a spirited case for using corporate financial data as an alternate measure of real growth in the manufacturing sector, and pointed to Annual Survey of Industries data being far more comprehensive than the Index of Industrial Production (IIP), many believe the GDP data to be released later today would be higher if only IIP was to be excluded. Though ASI data, available with an 18-20 month lag, generally shows higher growth than IIP, the PMEAC analysis itself shows, once the necessary adjustments are made to ASI data, there isn’t necessarily an upward adjustment in GDP growth—while manufacturing GDP was adjusted upwards in 2005-06 to 2008-09, it was adjusted downwards in 2009-10.
More important, look at almost any data-set, and it doesn’t show a trend dramatically different from the IIP. Sales of commercial vehicles, a leading indicator for economic growth, rose 17% in Q1FY12 and this reduced to a mere 6.1% in Q1FY13; two-wheeler sales growth slowed from 14.6% to 10.5%; corporate sales growth for a sample of 421 service sector firms was 26% in Q1FY12 and this fell to a mere 1.5% according to data from Axis Bank. Data on new project announcements and projects under implementation also show a similar trend. Indeed, the dramatic flattening of the yield curve (see graphic on page 1 on the close correlation with GDP growth) indicates, like nothing else does, that the economy is far from improving in the manner the PMEAC forecasts. Whether Q1 GDP will be sub-5% as Axis Bank forecasts or a little higher will largely depend on how agriculture fares. While sales of fertilisers in Q1FY13 are down compared to Q1FY12 and area sown till July 27, 2012, is also lower than in the previous year, this won’t affect agriculture’s Q1 performance.
That the economy remains in trouble is hardly surprising since, at the end of the day, the mathematics of growth can’t be wished away. The high growth of the mid-2000s was largely driven by a sharp surge in investment levels and that, in turn, was made possible by an equally sharp jump in saving levels—otherwise there would have been an unsustainable current account deficit. And the surge in savings was largely driven by government savings rising, from minus 2% of GDP in FY02 to plus 5% in FY08. This has now fallen to a likely 0% in FY12 and is projected, by Morgan Stanley, to rise to 0.3% of GDP in FY13—unless this is fixed, and expands sharply, the chances of higher growth are low. Getting households to save less in gold (as our front page story says is already happening) or clearing investment hurdles will help, but nowhere near as much as hiking diesel prices will since that is what will lower government dissavings.