Do the gross domestic product (GDP) estimates for the first quarter (Q1) of the current fiscal year (FY12) show a slowdown in economic growth? Yes they do, if we look at the estimates of GDP at factor cost at FY05 prices. GDP growth according to this metric has slowed a tad from 7.8% year-on-year (y-o-y) in Q4 of FY11 to 7.7% in Q1 of FY12.
But the answer is no, there is no slowdown, if we look at the estimates of GDP at market prices (at FY05 prices). If we use this measuring rod, we find that y-o-y GDP growth was 8.5% in Q1 of FY12, compared with y-o-y growth of 7.7% in Q4 of FY11. So, according to this estimate, the growth rate has actually perked up. Which estimate is the right one?
Also See | Growth Up Or Down In Q1 (PDF)
Well, the expenditure-side estimates of GDP have always been problematic—recall the instance when they had to be revised substantially immediately after they came out? But if the demand-side numbers are so flawed, why not junk them altogether?
Two divergent trends in growth as the result of two different ways of measuring GDP raise serious questions about the quality of the numbers. Moreover, while the Q1 numbers for FY12 and FY11 have been computed using the new Index of Industrial Production (IIP) series, the data for other quarters has not been revised, which makes comparisons difficult.
The GDP growth for Q1 of FY11 has been revised down from 9.3% to 8.8%, giving a boost to the growth rate for Q1 this fiscal. But if the data for Q4 of FY11 is revised according to the new IIP, will growth still be 7.8%, or higher or lower? We suspect even the Central Statistics Office doesn’t know. The accompanying Chart 1 shows the differences in GDP growth using the supply-side and the demand-side numbers.
If we take the numbers at face value, what are the trends? Taking the demand side first, there has been a noticeable deceleration in the growth of private consumption. The y-o-y growth in private final consumption expenditure was 8.9% in Q2 of FY11, 8.6% in Q3, dropped to 8% in Q4 and then to 6.3% in Q1 of FY12.
On the other hand, there has been a pickup in investment demand. Gross fixed capital formation went up by 7.9% in Q1 of FY12, well above its miserable 0.4% growth during the previous quarter. This is not what capital goods companies are telling us and the IIP data on capital goods remains as volatile as ever, even after the revision. The trends are evident from chart 2.
Slicing the data another way, as much as 64.4% of the incremental growth in GDP at market prices during the quarter (after adjusting for discrepancies) was on account of private final consumption expenditure. As much as 40.8% of the incremental growth was due to gross fixed capital formation. This is a huge change from Q4, when fixed capital formation hardly contributed to growth.
In short, the demand-side trends show a deceleration in consumption growth and a bounce in investment demand.
Looking at the supply-side numbers, the base effect, of course, is very strong. For instance, manufacturing growth has been 7.2% y-o-y compared with 5.5% in Q4, but then the sector grew by 15.2% in Q4 of FY10 and by a much lower 10.6% in Q1 of FY11, so the base effect is obvious.
Nevertheless, the trend in construction, for instance, shows a very sharp slowdown. Also, financing, insurance and business services grew at 9% in Q4 of FY11, on top of 6.3% growth in the year-ago period. In Q1 of FY12, they grew by 9.1%, on top of 9.8% growth in the year-ago period. Clearly, this is one sector in which the momentum has increased.
The GDP numbers can also be used to gauge the level of inflation in the entire economy by comparing the numbers at current prices with those at constant prices. The difference is the inflation rate. The Wholesale Price Index numbers, on the other hand, do not take inflation in services into account. Chart 3 shows the inflation rate according to the GDP data. Inflation is falling, but remains very high.
A GDP growth rate of 7.7% and especially the strong growth in services show that growth is moderating, but very gradually. That is in tune with other data, such as the HSBC Purchasing Managers’ Index surveys and the growth in non-food credit.
Firms are likely to continue to have enough pricing power in this environment and the Reserve Bank of India is unlikely to change its monetary stance based on these numbers.
Graphic by Sandeep Bhatnagar/Mint
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