The growth in gross domestic product (GDP) at factor cost and at constant 2004-05 prices was 8.8% in the June quarter. But GDP growth at market prices (which is GDP at factor cost plus indirect taxes less subsidies to arrive at GDP from the expenditure side) and at constant 2004-05 prices grew by 3.65%. The difference between the two rates of growth is as high as 5.15 percentage points. To be sure, as Royal Bank of Scotland economist Gaurav Kapur points out, subsidies are lower and taxes are higher this year, but that is unlikely to result in this big a difference. Minor discrepancies are all very well—this is a quick estimate and, therefore, will be revised—but such a large divergence does cast doubts on the quality of the data. Especially because, within the GDP estimates on the expenditure side, the change in the item “discrepancies” from a negative Rs2,872 crore in the June 2009 quarter to a positive Rs22,092 crore in the corresponding quarter of fiscal 2011 accounted for a massive 62.1% of the growth in GDP at market prices at constant 2004-05 prices.
Also See Two Facets of GDP Growth (Graphic)
That’s not all. Take GDP at market prices at current, instead of constant, prices and the year-on-year (y-o-y) growth in GDP works out to 24.8%. But if we take GDP at factor cost at current prices, the y-o-y growth in GDP works out to 21.7%. So the difference in percentage points between GDP at market prices and GDP at factor cost is less at current prices than at constant prices. This seems odd because the only difference between GDP at constant prices and at current prices is the rate of inflation.
These discrepancies make the expenditure-side numbers suspect and, hence, it makes little sense to analyse them. Nevertheless, a few points can be made. First, the share of consumption in GDP is down to 58% from 59.9% in the year-ago period. That fits in with the poor growth in consumer non-durables in the Index of Industrial Production (IIP) data. It’s very plausible that inflation has led to lower purchasing power, especially among the urban poor. But then, the adjusting item called “discrepancies” has gone up from -0.3% of GDP to 1.9%, so it’s entirely possible that the lower consumption proportion is on account of that effect. Net exports (exports minus imports) were even more negative than in the year-ago period. Both exports and imports at constant prices during the June quarter were lower from a year ago. That seems to indicate that the entire growth in imports and exports is due to higher prices. While it’s possible that exports in volume terms may not be doing so well, surely the case is different for imports? Unless, of course, there were one-off factors such as defence imports in the year-ago period. Also odd is gross fixed capital formation remaining constant at 31.2% of GDP in both the June 2009 and June 2010 quarters. In the June 2009 quarter, the economy was still recovering from the global slowdown, and the thought of capex was far from anyone’s mind. In the like 2010 quarter, surely the investment climate should have changed substantially for the better?
The 8.8% y-o-y real growth at factor cost is in line with the robust growth shown by monthly data such as IIP and the manufacturing and services purchasing managers’ index. But the low base effect will not help in the September quarter—while GDP growth in the June quarter last year was 6%, it jumped to 8.6% in the September quarter. Nevertheless, higher farm incomes as a result of a good monsoon will drive consumption, while capital expenditure, too, will rise as companies start expansion plans to meet the increased demand. Exports, however, are likely to prove a dampener.
Graphic by Yogesh Kumar/Mint
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