Is the Indian economy growing only in numbers?

What is the state of India’s economy now? Has the growth picked up in the October-December quarter for which the data was released late last week or, has it weakened? Well, the latest statistical jugglery has left the average Indian, who may not read numbers beyond the headline, thoroughly confused.

The government released the gross domestic product (GDP) growth numbers on Friday, that said that in the third quarter of 2019-20, the economy grew at 4.7%. From the headline, it appeared that the economy was picking up, albeit slowly, from 4.5% growth in the previous quarter (July-September).

But the initial euphoria faded, when going beyond the headline, data revealed that the economy in the latest quarter under review (Oct-Dec) has actually slowed. This was because the growth rate of the previous quarter (July-Sept) was revised upwards to 5.1% from the original 4.5%. This tweak made the 4.7% look smaller. The jubilation was short-lived and headlines were changed from growth to slowdown within minutes.

How did the economy, which witnessed the worst September quarter performance in the past six years, suddenly see a sharp upward revision of 0.6 percentage points within a matter of weeks? That was made possible by revising the previous year’s numbers sharply downwards. The Central Statistical Office (CSO), which went a step ahead to downgrade the growth numbers for the financial year 2018-19 to 6.1% from 6.8% in January this year, had already prepared the ground for the subsequent numbers to look better.

Such a significant downward revision of the previous year’s number pushed up the quarterly growth estimates of the current financial year (2019-20). The phenomenon, in economic parlance, is called the base effect, where a low base from the preceding financial year, typically, exaggerates figures in the current financial year, as the growth rates are calculated on a year-on-year basis.

On the basis of these revisions, the government is now projecting the economy to grow at 5% in the financial year 2019-20 that ends on March 31. The prevailing slowdown in global growth, of late, due to the coronavirus spread, and its impact on India does not corroborate the government’s estimates. Added to that are India’s own problems of revenue shortage and widening deficits and its terrible performance on the external trade front.

To achieve the 5% growth rate in the full year (2019-20), the economy will have to grow at 4.6% in the fourth or the last quarter, that is, January-March. One more statistical adjustment, which is due in the month of May, may make it possible for the government to attain that number but the ground realities would look starkly different from the statistical data.

What are the reasons?

The weakness in the just-released real GDP growth was entirely led by investments. Consumption looked a tad better in the December quarter because it was largely driven by government spending. In fact, the GDP growth, excluding government consumption expenditure, was at only 3.9% in the December quarter. However, going forward, government spending will not be the same. As it approaches the fourth quarter, the pace of spending will decline sharply in order to meet the deficit targets. The absence of such fiscal spending, which supported growth in all the three preceding quarters, will weaken it further. But the CSO has not taken that into account while estimating the full-year growth number.

The fiscal deficit data, released simultaneously with the GDP numbers, showed that government spending has declined 6.4% year-on-year in January. In February and March, it could go down further. Secondly, the CSO has also not taken into account the impact of coronavirus on India’s GDP in the coming quarters. Though any direct impact of the virus on India’s GDP could be minimal if one goes purely by India’s share in the world GDP. However, the indirect impact could be significant through trade, tourism and financial market channels.

Next, the revised numbers and projections for the upcoming quarter appear questionable based on their current performance. Hence, they do not support a growth rate of 5% in the current financial year. For example, Agriculture, which expanded at 3.5% in the third quarter, did so purely on a low base of the last year and estimates of high foodgrain production. Last year, the farm sector had grown by 2.2%. Going forward, the advantage of base effect and robust foodgrain output may diminish.

The growth in the industry has come down to 0.1% in the quarter under review from 5% in the previous quarter. Barring mining, most others such as manufacturing, power, water, gas and others have declined.

The gross fixed capital formation, which is a proxy for investment in the economy, has turned negative since the second quarter and declined further in the third. It has been projected to turn positive in the January-March period. It is highly unlikely that the current investment climate can turn it positive.

Does the government’s optimism of a 5% growth this year have any solid base other than its extreme dependence on revenues it expects from tax litigation cases for which it announced a one-time amnesty in the union budget this year?