Photo: Mint
Photo: Mint

Why on earth was everybody complaining about dismal economic growth?

The economy was very far from being the basket case we thought it was in 2013-14

It turns out we were all horribly wrong. The economy was very far from being the basket case we thought it was in 2013-14. The manufacturing sector was growing at quite a respectable pace. Those jeremiads about the mining ban were completely misguided. Private consumption, which we worried was going to slump because of high inflation, was actually in the pink of health. Gross domestic product (GDP) at market prices, in constant 2011-12 rupees, grew a wondrous 6.9% in 2013-14, according to the Central Statistics Office’s (CSO) new GDP series. So long, under the earlier 2004-05 series, we were labouring under the mistaken notion that growth had sunk to 5% at market prices and 4.7% at factor cost.

Of course, none of the other financial data, corporate bottom lines, industry numbers and anecdotal evidence reflected an economy growing at nearly 7%. But the CSO says it did. According to the new data, far from twiddling their thumbs while the economy tanked, the United Progressive Alliance government in 2013-14 actually managed to pull off a spectacular improvement in GDP growth, from 5.1% in 2012-13 to 6.9% in 2013-14. What on earth was everybody complaining about?

How did the CSO manage to do it? We must of course welcome the updating of data, the finding of new sources, the introduction of new and better methods of capturing numbers and the inclusion of new activities. After all, the economy in 2011-12 was a very different one from the one we had in 2004-05. So, after making all these improvements to the data, do we now get a much larger economy? Unfortunately, no. After this exercise, the brand-new GDP at market prices for 2013-14, at current prices, is 113.45 trillion. That is slightly lower than the earlier estimate of 113.55 trillion. It is, to be exact, a mere 0.088% lower. So, the size of the economy, after all these new adjustments to the data, turns out to be a mite lower than what it was according to the earlier measurements.

But if that is the case, how is it that GDP growth in 2013-14 has changed so dramatically? Well, the GDP for the previous year was revised downwards. While GDP at current prices at market prices under the old series was 101.13 trillion for 2012-13, under the new dispensation, it falls to 99.89 trillion. That pushes up nominal GDP growth to 13.6% for 2013-14, instead of 12.3% under the earlier series.

That’s a big increase, but not a huge one. For the really drastic growth increases, you have to look at GDP numbers at constant prices. GDP at market prices at 2004-05 prices was 61.95 trillion in 2013-14, up from 58.99 trillion in 2012-13, or a growth rate of 5%. With the change in the base year to 2011-12, that has become larger, because 2011-12 prices were higher than 2004-05 prices. GDP at constant prices, therefore, changed to 99.21 trillion in 2013-14 from 92.81 trillion the previous year. That means a growth rate of 6.9%, much higher than the earlier 5% estimate.

Note that this striking revision in growth rates at constant prices is only for 2013-14. In 2012-13, GDP growth at market prices, with 2004-05 as the base year, yielded growth of 4.7%. That was revised upwards to 5.1% in the new series. That is nowhere as dramatic as the change in the 2013-14 growth rate.

Digging into the data at constant prices for 2013-14, there are a number of remarkable changes. Private final consumption expenditure, which grew 4.8% under the old series, now grows by 6.2%. Gross fixed capital formation, which was mildly negative under the old series, now grows 3%. Government consumption, which had grown by 3.8% under the old dispensation, now grows 8.2%.

There have been some violent changes as a result of the shift in computation from factor cost to basic prices. Growth in “trade, repair, hotels and restaurants", which, according to the old series, at constant prices, was a mere 1% in 2013-14, is now a mind-boggling 13.3%. Mining and manufacturing, which we thought were contracting, now turn out to have grown at a respectable 5.4% and 5.3%, respectively, in 2013-14.

Because the nominal GDP for 2013-14 hasn’t changed much, the fiscal deficit for the year remains at 4.6%. Similarly, the current account deficit as a percentage of GDP or indeed any number as a proportion of nominal GDP, remains the same, merely because nominal GDP hasn’t changed appreciably.

Since everybody says there has been an improvement in the economy in recent months and since animal spirits and consumer confidence are high, does it not mean that GDP growth will be even higher this fiscal, say, 7.5%? The 6.9% growth number for 2013-14 throws out of joint most of the assumptions economists had about the economy. On 9 February, when the GDP numbers for the third quarter will be announced, few will know what to make of the data, all the more so because we do not have the new quarterly GDP numbers. Policymakers will have a hard time figuring out just what is going on in the economy. As for the Reserve Bank of India, now that one of the most important inputs for policymaking has been changed so sharply, surely it should wait for more clarity on the data before deciding what to do next? If the economy is indeed growing at 7.5% or thereabouts, where’s the hurry to cut rates?

Manas Chakravarty looks at trends and issues in the financial markets. Your comments and feedback are welcome at