Real growth, or a case of ‘Shanghai’ stats?

The ‘real output of the Indian economy is currently growing at an annual rate of 25 per cent’. Sounds outlandish? Of course it is. The growth rate for the Indian economy in the instant case, is a mere extrapolation of the growth in passenger throughput at the Kempegowda International Airport, Bengaluru, for the calendar year 2015, as a recent report in this paper had noted ( Businessline January 20). If Bengaluru airport traffic is growing at this rate, surely the overall air passenger traffic in the country or, for that matter, the transportation sector and, by extension, the services sector of the national economy leading to the broader economy itself, is growing at this rate?

But any claim for the broader economy based on the anecdotal evidence of growth in air travel might quite justifiably be regarded as a bit of a stretch.

That said, it must also be recognised that the anecdotal evidence proffered by experts to dismiss official claims on the GDP growth (7.4 per cent in the second quarter of the current fiscal 2015-16) as an example of ‘Shanghai’ statistics, fares no better. Sometimes it is not even any anecdotal evidence but a general observation about the state of the economy. ‘Where is the growth in the GDP if there is a pall of gloom across so many sectors of the economy’? That is the general refrain.

But that there are some claims that are a bit more specific. There is for instance, the anecdotal evidence of decline in merchandise exports to question official claims on growth of the economy. It is true that merchandise exports have indeed declined in the first two quarters of the current fiscal. In dollar terms, these have nearly halved. But when weighed against three important pieces of evidence, the sluggish performance of the export front as an argument to dismiss official data on GDP numbers loses much of its force.

One, Indian economy is not as export-driven as, perhaps, the Chinese economy. Thus export performance as a proxy for growth of the broader economy is itself open to challenge. Two, the bulk of the merchandise exports consists mainly of non-oil, manufactured goods (a little over 60 per cent). But the manufacturing sector itself now accounts for a little less than 20 per cent of the economy which is dominated by the services sector. Even within manufacturing sector petroleum product exports haven’t suffered much damage. As against 31 million tonnes of product exports in the first of 2014-15, the corresponding figures for the current fiscal stand at 29.2 million tonnes — a decline of just 6 per cent.

Lastly, the export of services has held up quite nicely in the face of overall sluggishness in the global trade in goods and services. So critics need to look elsewhere for support if the GDP data has to be labelled ‘Shanghaish’ in character.

A lot of emphasis has been laid on the lacklustre performance of growth in bank credit. It is true that bank credit — which is running currently at a growth rate of roughly 11 per cent year on year — is well below the 15-16 per cent rates registered in the past. But against this must be set the fact that bank lending is a bit player in the larger scheme of investments taking place in the economy.

If one compares the net fixed capital stock in the economy and compare it to the volume of outstanding bank loans, it works out to less than 20 per cent. This is hardly surprising. The criticism all along has been that banks have had such a marginal role in capital mobilisation across different institutional segments (public, private and household sectors) of the economy.

Moreover, output in the short run could be influenced by absorption of excess productive capacity in the system and thus weak signals emanating from the bank-credit front is no justification for challenging the current data on output in the economy.

This analysis would not be complete without a reference to the evidence from indices of purchasing managers’ near-term procurement intentions, called the Purchasing Mangers Index. The underlying idea being that such procurement intentions set the tone for changes in the output of the economy, going forward.

A decline in the number for a particular period from a base figure of the index (usually set at 50) represents a contraction in the physical quantum of output from an earlier period while variations above this figure represents growth in output although the pace of such growth could vary from time to time.

Critics of the official estimates of GDP growth have pointed out to negative signals emanating from these indices. A case in point is the recently released Nikkei’s Manufacturing Purchasing Managers’ Index, which fell to a 28-month low of 49.1 in December 2015 from the previous month’s figure of 50.3 (November).

How could the economy be growing at 7.4 per cent when the manufacturing sector (Nikkei’s Manufacturing PMI for December) is actually in decline? So goes the argument.

But the problem with these indices is that they have over the years, evolved into something more complex than a mere index of near-term buying intentions of purchasing managers into one that captures a general mood of mangers (business sentiment) index. Consequently, many of them seek to record such aspects as changes in new orders for goods/services, output, changes in levels of employment, variations in lead times for delivery of goods and changes in inventory levels.

Thus, it is not even an index of output but rather a representation of complex combinations of factors that affect business sentiment as a whole.

In the case of Nikkei’s manufacturing PMI for India, output is given a weight of 25 per cent in the overall value of the index. But GDP numbers are about output plain and simple. It doesn’t seek to capture anything else that remotely in the nature of business sentiment. To use therefore, an index number that embodies a vague notion of ‘sentiment’ to cast doubts about the official GDP data is egregious, to say the least.

It is nobody’s case that GDP numbers are picture perfect. Heaven knows there are many gaps in the information gathering process. But those criticising official estimates haven’t pointed out to any methodological flaws in the estimation mechanism of the Central Statistical Organisation or any obvious errors in the numbers put out for various sub sectors. So, such criticism neither serves the interests of the public nor help in the refinement of the estimation process.