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Home / Opinion / Views /  The return of puzzling numbers for India’s GDP growth

A puzzle of sorts has arisen—again—in India’s official gross domestic product (GDP) estimates. They don’t meet the smell test.

Back in 2015, the Central Statistics Office’s practice of using ‘single deflation’ instead of ‘double deflation’ during a period of falling commodity prices had distorted growth prints, as per our analysis. This time, too, there seems to be some distortion in growth numbers, but for a different reason.

What is it? The government’s statistics office reported that the economy expanded far less than expected in the third quarter (October to December 2020), and estimates that it will shrink 1.1% in the fourth quarter from a year ago. This sits oddly with the high-frequency indicators we track, which have been ticking higher. It also sits oddly with another measure of growth, gross value added (GVA), which wasn’t as weak in the third quarter and is estimated by the office to grow 2.5% in the fourth.

A careful investigation reveals a new methodological issue in the calculation of growth that is not just distorting current estimates, but could impact our data for the next few years. It could even have altered growth estimates over the past few years.

So, what is going on here? What is the quantum of distortion in the numbers? And what is the actual growth on the ground? Let us explain.

In national accounting, we know that GDP equals GVA plus indirect taxes minus subsidies. We also know that indirect taxes grew sharply in the third quarter. So, for GDP to grow at a much slower pace than GVA, subsidies would have had to grow strongly, and by more than all the pandemic-related subsidies that the government has announced.

But why would that be? Because the budget on 1 February made it all too clear that over the next two years, the government intends to pay off the past dues it owes Food Corporation of India (FCI), which is the intermediary for food subsidies in India. To be precise, it aims to repay the equivalent of 0.9% of GDP in 2020-21 (which runs from April 2020 to March 2021), and 0.3% of GDP in 2021-22. These repayments likely resulted in bloated subsidy growth, thereby depressing third-quarter and fourth-quarter growth estimates.

But shouldn’t the GDP methodology have a way to take care of this without distorting numbers? Yes, it would, if every economic entity used the same accounting methodology. But that is not the case.

For simplicity’s sake, let’s look at FCI and the central government. If both did accrual accounting, we would not have a problem. FCI would account for subsidies in the year they accrued, and the government would account for them in the same year too. In this situation, GDP would be a better indicator of underlying growth in the economy, rather than GVA, because it strips out the subsidy payments which tend to inflate GVA.

The problem arises because FCI and the government follow different accounting practices: FCI does ‘accrual accounting’ while the government does ‘cash accounting’. In such a situation, discrepancies arise if the subsidies in FCI’s books accrued, say, last year, but the government only paid up in the current year. To arrive at the GDP number, the statistics office would end up subtracting from current GVA more subsidies than what accrues in the current year. This would lead to an underestimation of GDP growth in the current year.

Indeed, the statistics office’s 2020-21 advance estimate for GDP growth is -8%, lower than the GVA advance estimate of -6.5%. About half of the 1.5 percentage point difference, by our calculation, is because of distortions created by the payment of past subsidy dues.

Were previous-year growth numbers impacted too? Probably, although it is likely to be a case of growth overestimation. The government has owed money to FCI in recent years, and the amount picked up rapidly from 2017-18. Over this period, FCI would have accounted for the subsidies in its books (following accrual accounting), and this would show up in GVA. However, the government did not pay up on time. As such, a smaller cash subsidy amount was deducted from GVA to arrive at GDP (since the government does cash accounting), thereby potentially overstating the country’s GDP growth in that period.

And by how much could future growth numbers be impacted? The underestimation in 2020-21 GDP growth could inflate 2021-22 numbers because of a low statistical base. However, some of the base effect gains could be offset by the balance payment of past subsidy dues (budgeted at 0.3% of GDP in 2021-22), which would depress GDP (as it did in 2020-21). We have analysed this carefully and find that, on net, the positive base effect overshadows the negative payment of subsidy dues, leading to GDP growth being overstated by 1 percentage point in 2021-22.

Finally, the repayment of balance dues in 2021-22 could impact 2022-23, again due to low base effects. We calculate that GDP growth may be overestimated by half a percentage point in 2022-23.

With all of this going on, what is India’s ‘true’ economic growth? In normal times, GDP is a more wholesome indicator of economic growth than GVA, because it includes the government as well. But with GDP impacted by the payment of previous-year subsidy dues, we think GVA will better reflect economic growth in 2020-21, 2021-22 and 2022-23, or until whenever these puzzling GDP numbers abound.

Pranjul Bhandari is chief India economist at HSBC.

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