What’s different about the new GDP

There have been heated debates over India’s recent growth estimates put out by the Central Statistics Office (CSO) — and rightly so. A couple of months back, concerns about the prolonged slowdown that gripped our economy were rampant. But that was before the CSO released new gross domestic product (GDP) data in January. The revised growth number for GDP reveals that the Indian economy has been surging over the last two years. 2013-14 was, in fact, a year of sharp recovery in the Indian economy. The current fiscal has been even better, with the GDP pegged to grow by a solid 7.4 per cent.

The revision has bumped up India’s growth numbers sharply and put them at odds with other leading indicators of industrial activity, such as the Index of Industrial Production (IIP), which still shows weakness.

Economists are baffled at how such a sharp growth could go unnoticed when, at the ground level, companies are still grappling with weak demand, high debt and low earnings.

So, should all the gobbledygook about new and old growth numbers matter to you? Well, yes, because the state of the economy is usually indicative of how much you earn. A higher GDP is usually a good sign, implying better living standards. For the investor, the implications are more direct — a higher growth in the economy will mean better corporate earnings.

Here are four things that help you understand the changes in the new GDP.

If you jog your memory on statistics, you’ll remember that the larger the sample, the more accurate is the study. This is one of the reasons why the CSO decided to change the database for calculating GDP. The new GDP incorporates more comprehensive data on corporate activity than the old one. Earlier, data from the Annual Survey of Industries (ASI), which comprises over two lakh factories, was used to gauge activity in the manufacturing sector.

Now, annual accounts of companies filed with the Ministry of Corporate Affairs — MCA21 — has been used. This is said to include around five lakh companies, bringing in more companies from the unlisted and informal sectors.

Two, until now, the manufacturing data was compiled factory-wise. Now, activity at the enterprise-level is taken. This means selling and marketing expenses are also reckoned, instead of just production costs.

The change : The manufacturing sector, in particular, has shown a far better performance. The change in measuring the value addition in the manufacturing sector is one of the main reasons for the bump-up in growth numbers.

Earlier, it was computed using the data from IIP and the ASI. The first estimates put out in any year were based on IIP (based on output volume) and these were revised after two years, when the ASI data was available to capture value addition.

This could be one reason why the new data, which already captures the value addition in the first year by using the MCA21 database, varies from the old one. The CSO has highlighted that any improvement in corporate performance, which was aided by higher inflation and low input cost, is now reflected in the new series.

At odds : While the new GDP shows 5.3 per cent growth in manufacturing in 2013-14, the actual performance of NSE-listed companies in the manufacturing space shows that earnings have been declining in the last two years (by 4 per cent in 2013-14). Whether the numerous unlisted companies, particularly in the informal sector, have displayed such a sharp improvement in productivity is open for debate. If we look at the listed universe, the companies in the small and mid-cap space have seen their earnings shrink further in the nine months of 2014-15.

The explanatory notes on the new GDP may throw you off track for a moment by using a new term — value added — to explain the difference between the old and the new method. But stick to the basics taught at school — it is always the value added in production that is used to compute GDP.

So, where’s the difference? Under the old method, GDP was calculated at factor cost; now it will be done at basic prices. To understand the difference, let us look at it from the producers’ point of view. For a producer, GDP at factor cost represents what he gets from the industrial activity. This can be broken down into various components — wages, profits, rents and capital — also commonly known factors of production. Aside from these costs, producers may also incur other expenses such as property tax, stamp duties and registration fees, among others.

Similarly, producers may also receive subsidies (production related) such as input subsidies to farmers and to small industries (not food or petrol subsidies that you get on the final product). It is important to note that only taxes and subsidies on intermediate inputs are adjusted.

For arriving at the new gross value added (GVA) at basic prices, production taxes, such as property tax, are added and subsidies are subtracted from GDP at factor cost. Put simply, GVA at basic price represents what accrues to the producer, before the product is sold.

The change : The presence of certain factors which are independent of the level of production, such as production taxes, is one of the reasons for the wide disparity in sector-wise growth under the two methods. For instance, despite an output contraction in manufacturing in 2012-13, the GVA at basic price increased by 6.2 per cent.

At odds : The CSO attributes the wide disparity to improvement in productivity. But this is not reflected in companies’ performance. The 6.8 per cent growth projected for manufacturing in 2014-15 is in stark contrast to the 5 per cent decline in earnings in the nine months of 2014-15 for the NSE-listed manufacturing companies.

While the growth in the economy under the old series was gauged by the growth in GDP at factor cost, under the new series, the headline growth, which is pegged at 7.4 per cent for 2014-15, is based on GDP at constant market prices — involving more adjustments to the above calculated GVA at basic prices. The first level of adjustment is to convert to market prices.

The price paid by the consumer is not the same as the revenue received by the producer. This is because of the taxes that are paid to the government in the form of indirect taxes. Similarly, the consumer may receive subsidies on food or petrol.

GDP at market prices makes adjustment for any such subsidy or indirect tax — to arrive at GDP at market price, indirect taxes are added while subsidies are subtracted from GVA at basic price.

The change : The GDP at the aggregate and sector level has significantly changed. The average share of the industrial sector has moved up by 5.6 percentage points from 26.1 per cent in the old series to 31.7 per cent under the new series, for 2011-12 to 2013-14.

At odds : Due to the poor performance of companies in the manufacturing sector, the share of their earnings in the NSE-listed universe has actually gone down by over 4 percentage points in the last two years (2011-12 to 2013-14).

Did lower inflation help?

Finally, inflation needs to be adjusted to arrive at GDP at constant market prices. The CSO has assumed a lower growth in both WPI and CPI inflation for 2014-15. The GDP deflator (ratio of nominal to real GDP) — another measure of inflation — increased by 3.8 per cent in 2014-15 as against 6.2 per cent in 2013-14. The real GDP is pegged to grow by 7.4 per cent in 2014-15 (from 6.9 per cent in 2013-14), while the growth in nominal GDP will be lower at 11.5 per cent as against 13.6 per cent in 2013-14.

The change : The decline in inflation — measured by the GDP deflator — has turned the modest deceleration in the growth of GDP at current prices into higher growth in GDP at constant prices.

At odds : If CPI inflation according to most estimates hovers close to 6.7 per cent in 2014-15, (6 per cent assumed by CSO), then there is a likelihood of growth in real GDP falling from the projected 7.4 per cent level.