If CSO’s new estimates of GDP growth for FY14 were a shocker, the Advance Estimates for FY15 are even more amazing since they project a 7.4% growth as compared to the 5.5% that most analysts seemed to be pencilling in—the consolation here is that, like the analysts, even CSO is looking at a 50 bps hike in growth. What is difficult to explain, as is true for the FY14 data, is how this growth is to be achieved. Government expenditure that has been sharply compressed over the past two years is projected to grow at 10% in real terms—in April-Dec, it grew 6.2% in nominal terms; so, what is being projected is a sharp surge in Q4 or a much higher growth in spending by PSUs and by state governments, none of which appear plausible.
As with the FY14 data, the same questions arise: why don’t the numbers square with the high-frequency data on credit, exports, or taxes? After all, if the share of manufacturing in GDP has risen from 12.9% a few years ago to 17.6% for FY15, surely this should have been accompanied by a rise in the IIP, in exports and in credit growth? Pronab Sen, the head of the National Statistical Commission, argues the change lies not in the production data which is what IIP and exports measure, but in the value-addition. There is also the issue of the kind of data being used, since a lot of the post-manufacturing value-added is now being shown as manufacturing instead of as services. The problem with the argument, however, is that the value-addition has to show up somewhere. If Maruti Suzuki is not producing more cars, as was asked by the CNBC anchor to Sen, but was simply producing them more efficiently, surely this would mean Maruti’s profits were rising and that it should be paying more corporation taxes? Sen’s reply was that this was indeed the case, and that, over the next month, corporates would be paying more taxes—that is something that needs to be watched. Such value-addition should logically also result in wages and factory utilisation levels rising, neither of which appears to be happening right now. One possibility is that, while the government is using more tax data to estimate production, it has not factored in the taxman’s habit of arm-twisting firms to pay more taxes upfront and collecting refunds later; that is, incorrect tax data is distorting manufacturing GDP. Another is that, while the coverage of service taxes is rising, this is being mistaken for a growth in services.
Since the new numbers don’t make the nominal GDP numbers for FY15 too different from those assumed in the budget, there will be little impact on the fiscal deficit. Normally, a 7.4% growth would quell any demand for rate cuts, but the fact that core inflation has collapsed with this level of growth implies India’s potential output growth—this is what RBI looks at along with inflation data—is probably in the 8% range now;either way, with inflation continuing to remain low, the case for rate cuts remains as strong.