“When the facts change, I change my mind,” said John Maynard Keynes. Will the revised data on gross domestic product (GDP) for 2010-11 make us do likewise?
For the revised GDP estimates issued last week question popular descriptions of India’s growth slowdown, challenge estimates of a lowered potential output and possibly shed some light on the inflation-growth disconnect in 2012. The improved data has been computed from the dependable Annual Survey of Industries (ASI) rather than the notorious Index of Industrial Production (IIP); it compels us to revisit these issues and raises policy setting concerns.
The facts: India’s GDP growth for 2010-11 stands reworked to 9.3% instead of the earlier estimate of 8.4%—nearly one percentage point higher. Much of this increase comes from revised manufacturing sector growth—9.7% year-on-year, or 2.1 percentage points more. What’s more, the increase in the estimated growth for 2010-11 is itself built upon a 1.6 point increase in growth during the previous year (now 11.3% for 2009-10).
On the demand side, it was the capital stock growth that contributed 4.2 percentage points to the 10.5% real GDP growth (at market prices). Gross fixed capital formation growth is now placed at 14% year-on-year, nearly double the earlier measure of 7.5%, and a substantial jump over the 7.7% growth in 2009-10; this acceleration lifted the real gross capital formation rate to 40% in 2010-11, from 38.4% the previous year. The other demand component that has been revised is public consumption: growth in actual government expenditure was a more modest 5.9% in 2010-11 against the 8.2% recorded earlier and a big drop from the 14% growth in 2009-10.
The new facts challenge some hypotheses about the collapse of the India growth story. For one, the “policy paralysis” explanation that throttled investments and exacerbated supply constraints from 2010 weakens in the light of robust manufacturing growth and capacity creation in 2010-11. This may explain the sudden, sharp drop in growth to 6.2% in 2011-12, when scams emerged to dent business confidence, but not before.
Next, the buoyant growth in capital stock in 2010-11 questions lowered potential output estimates by many. How does this affect growth projections based on a lowered growth potential of the economy? And if policy paralysis and potential output assessments are corrected, does that make the 2011-12 growth slump a cyclical occurrence instead of the widely held belief of a structural decline?
The wide divergences in databases for computing GDP also pose the likelihood of revisions to the currently recorded 6.2% GDP growth in 2011-12. It is hard to predict the direction. But is the inflation-growth disconnect of 2012 a pointer? The persistence of inflation at high levels, notwithstanding growth slowing to a 5-5.5% crawl in 2012, might indicate GDP is understated.
Indeed, revised figures for private consumer spending in 2011-12 show this grew 8% annually against 4.9% estimated before; just a marginal dip over 2010-11. This confines the consumer demand moderation to the current year, 2012-13; possibly, the latter half if major consumer goods firms’ statements are an indication. Future revisions might well resolve such puzzles.
The implications for policy are pertinent—as misjudgement of aggregate demand significantly increases the probability of policy errors. For India, which has seen elevated inflation for several years now, popular accounts of inflation might bear re-examination too. For it now comes to light that the fiscal boost to aggregate demand and price pressures in 2010-11 was much less than earlier held. By contrast, GDP growth at 9.3% was surely above potential, making monetary policy even looser.
Renu Kohli is a New Delhi-based macroeconomist; she is currently lead economist, DEA-Icrier G-20 research programme and a former staff member of the International Monetary Fund and Reserve Bank of India.