Are they real?

Growth Figures

How fast is India growing? This question has troubled many economists, especially  during the past decade. But it has assumed a new salience in the past six months because much of the government’s complacency about India’s economic future rests upon its belief that India has been only lightly affected by the global recessions and will snap out of it on its own.

Both the Economic Survey and the budget speech this year were redolent of this complacency. Growth had fallen in 2008-9 only to 6.7 per cent. Based on a few initial stirrings of demand in June, the government was convinced that it would rise to 7 per cent or higher in 2009-10. In short there was little that it had to do.

This complacency would have been soundly punctured if Finance Minister Pranab Mukherjee, or the parliamentarians who heard him on budget day had read a short essay written by Shankar Acharya, as long ago as December 2006, and was republished earlier this year as part of a slim volume  of essays on the Indian economy. For in it Acharya raises a question that economists only whisper behind closed doors, lest it cost them membership of all future government committees.

Cheating the public

Are these growth rates real? Most economists believe that China’s growth estimates are somewhat inflated, but could this be true of India as well? In short is the government tacitly, if not deliberately, cheating the public?

Acharya believes that there is an element of overestimation. The official statistics are open to question mainly in their estimation of growth in the services sector. Till 1995-96 this closely paralleled and was almost identical to the rate of growth of industry. But from 1996-97 it took off on a separate trajectory, averaging 8.5 per cent growth per year till 2005-06, against industry’s 6 per cent.

Another perplexing feature of the Indian data is a suspiciously high rate of growth of productivity in the ‘traditional’ segments of the services sector — trade, transport and storage. This too finds no parallel in the experience of other industrialising countries, where the growth of productivity in industry and agriculture has, typically, been two and a half to three times the growth in the services sector.

Acharya therefore echoes the suspicion of two American economists and Arvind Virmani (currently the chief economic adviser to the government), that the contribution of the services sector is probably being inflated because service sector data are probably not being adequately adjusted for inflation. Acharya therefore adjusts the services sector data by assuming that throughout the period after 1996 it has grown at an average by one per cent more than industry. This, he believes is sufficient to reflect the rise of the IT, modern banking and other new service industries after liberalisation. Based on this, he concludes that the real rate of growth of GDP was probably 5.3 per cent between 1996-97 and 2005-06, ie 0.9 per cent less than the official estimate. By an extension of his reasoning, India’s growth rate between 2003-04 and 2007-08 has been not 8.8 per cent but 7.9 per cent.

In a little book, written in 2002 I had raised the same doubt, made the same adjustment to the services sector (for the same reasons) and concluded that the growth of GDP from 1996-97 to 2001-02 had not been 6 but 5 per cent.

But subsequent reflection has made me conclude that this adjustment is too stringent.

First, it is possible that services sector data are not fully adjusted for inflation. But neither are they for improvements in quality. By the same token, computerisation has added immensely to the productivity of services sector employees, but this too is difficult to capture in conventional estimates of changes in GDP.

Competition and price

Conventional estimates of GDP also do not capture two other components of GDP increases easily. The first is the sharp decline in prices that occurs as a result of competition. For instance the annual revenues of mobile telephone service providers has grown far more slowly than the number of calls, the distances over which they have been made and the number of minutes talked, because the last dozen years have seen a 90 per cent fall in call charges. In the same vein the typical passenger car costs no more today than it did in 2000, but the overall price level has almost doubled. Clearly in both these cases also the growth in real revenues does not reflect the increase in output.

Lastly, even in the traditional sectors there is a likely to be a difference between the growth of the services in a market that has always been free and in one that has recently been released from the constraints of a command economy. In Russia, eastern Europe and China this led to a sudden explosion of income in the services sector as shops and supermarkets blossomed in virtually every urban block.

In China the government is still running to catch up with this explosion. To do so it has carried out surveys and increased the size of its service sector twice — the last time in 2005. On that occasion it confounded the world by increasing its total GDP by 23 per cent.  There has been a similar, if less dramatic, freeing up of the service sector in India.

The diversion of the services sector growth rate from that of industry, is not therefore an anomaly.

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