The gross domestic product (GDP) performance of the first quarter (April-June) of the current financial year 2018-19 (FY19) has been beyond anyone’s expectation. An 8.2% growth of GDP, although from a low base of 5.6% in Q1 FY18, is commendable when one compares it with that of other countries, big or small. What is the source of this high growth? The foremost areas are agriculture, manufacturing and construction. A 5.2% growth of agriculture is really noteworthy. Going into it deeper one can find that the grain production is not performing very highly. At an average of 2 to 2.3/3% growth of grain is quite normal. The better performance in agriculture has been due to progress in allied activities. Vegetable production has been noteworthy, for example. In spite of all these, a section of economists are talking about the continued rural stress and the lack of rising purchasing power that has been a drag on the consumption demand in the economy. This has been a very big challenge for our policy makers.
The manufacturing growth has been 13.5% in Q1FY19. This is so also because of a low base due to demonetization and GST implementation a year ago. In the same period last year the manufacture growth was 1.8%. The method of measurement of the growth rate of manufacturing has been a matter of controversy. This is because adopting a new method in measuring GDP is quite different from the previous method. Service sector growth remained flat, actually it has declined slightly. This is a cause for concern for the government because the service sector growth has been a major component of India’s GDP. In this sector trade, transport, communications, etc. grew by 6.7%. Other services grew by 6.5%. One of the noticeable features of the Q1FY19 is its broad based growth. Economists like Pranab Sen, a former principal advisor, erstwhile Planning Commission, think the contribution of government services growth is also declining. This sector has a considerable share in GDP. It has come down to about 7% from about 16%. But coming to the construction sector one can see that its June quarter growth shows a recovery trend. In this quarter construction grew by 8.7%. That had been 1.8%, a very low rate, in the same period of the last year.
The debate on new measurement of GDP still alive
A section of economists have been in doubt about the new methodology of GDP measurement. Professors R. H. Dhalokia of IIM Ahmedabad and R. Nagaraj of Indira Gandhi Institute of Development Research, Mumbai, have shown (EPW, 1st September, 2018) overestimation by the Central Statistical Office in measuring GDP compared with the previous method. There are three areas that are responsible for overestimation of GDP according to Dhalokia and Nagaraj. One is shifting of the base year from 2004-05 to 2011-12. They think that the new series of NAS (National Accounts Statistics) with the base year 2011–12 shows that the manufacturing sector’s share in GDP at current prices, is significantly higher than reported in the older series (with 2004–05 base year).
Secondly, the GDP estimates of the CSO (Central Statistical Office) have been replaced by GVA (gross value added). The GVA and GDP are not the same. The relationship between the two is simply like this: GVA + indirect taxes - subsidies = GDP. Therefore at times GVA and GDP do not show equal value. These vary according to the tax and subsidy volumes of an economy. It is also said that GVA measures the economic aggregate from supply or production side whereas the GDP shows it from the consumers or demand side. Dhalokia and Nagraj have pointed out with an example that for 2013–14, the growth rates of manufacturing GVA, at constant prices, swung from (-)0.7% in the old series, to (+)5.3% in the new series. Such wide variations in the growth rates for the same years reported by the two series of the same publication, expectedly, drew widespread criticism, according to them, especially since the new estimates were quite at variance with other macro correlates.
Thirdly, to estimate manufacturing production, the new series/measure takes the data of Ministry of Corporate Affairs (MCA), instead of Annual Survey of Industry (ASI) data considered in the old series. According to Dhalokia and Nagaraj the ASI data are better for the purpose. This is because, according to them, the ASI, in fact, covers employment, investment, and value added of activities outside of the factory, such as the head office, R&D, sales and services, and so on. These are actually parts of the enterprise in most of the cases. They conclude from field survey data that “the very basis of the change in the approach to data collection for estimating manufacturing GDP seems questionable. Hence the higher share and faster growth rate of manufacturing sector reported in the new GDP series seems to have little justification based on mere coverage of ASI.”
The challenges ahead
There are many challenges ahead of India’s economy. The first is the stressed rural economy. There is a tendency to explain the rural economy by the data sale of consumers’ durables and cosmetics. This is a wrong way to get the real picture of the rural economy. Secondly, private investment is not picking up. The excess capacity in quite a large number of sectors is still present. Thirdly, the supply of credit is less than what is needed. Fourthly, the interest rates are rising. Fifthly, inflation is on the upward trend. From the international perspective, trade war among countries, the weakening exchange value of the rupee, rising prices of oil and oil products are headwinds for the Indian economy to move ahead. Therefore, the real challenge is to maintain more than 7.5% growth of the GDP in the coming few quarters.