While there is much storm over the Gross Domestic Product (GDP) estimates, and the accusation that the latter is being used as a pre-election tool to harp on the government’s achievements, this, to me is nothing but storm in a tea cup (pun unintended). For, it is the quality of the GDP which really matters. An objective assessment of the same is possible through looking at an important document released recently: the First Revised Estimates of National Income, Consumption Expenditure, Saving and Capital Formation For 2017-18, which creates puzzling questions going beyond the mere change in GDP estimates. Incidentally, the latter, in fact, have been explained in much detail in the document as well.
The questions we need to ask, especially against the backdrop of the controversies surrounding the GDP numbers, are: What has happened to the India growth story in the intervening years between 2013-14 and 2017-18? Has growth become more robust? How sustainable is such growth? India continues to be an expenditure-led economy. Not only is consumption expenditure by Indians growing at the same rate as it was during the last year of the UPA rule (2013-14) at 7.4 per cent, the proportion of consumption expenditure to GDP is also nearly the same at 56.3 per cent.
Government expenditure, which was growing at a mere 0.6 per cent per year in 2013-14, has grown at 15 per cent in 2017-18. The proportion of government expenditure to GDP has remained almost the same at 10.5 per cent between the last year of the previous and the current government. Such increases in government expenditure would have implications on India’s fiscal stability, as also lead to the hardening of interest rates for the private sector.
Most importantly, the investment growth — as measured by Gross Capital Formation (GCF) — seems to be strong, with a negative growth of investment (at -5.2 per cent) in 2013-14 being replaced by a strong 12.9 per cent growth of investment in 2017-18. Such investment growth was in fact up from 5.8 per cent in 2016-17. However, looking at the quality of investment — by analysing the components of investment — reveals a different picture altogether. Gross Fixed Capital Formation (GFCF), which is the true indicator of investment in an economy, grew marginally higher in 2017-18, at 9.3 per cent.
Change in stocks, which had registered negative growth rates (-35.6 per cent and -48.2 per cent growth) in 2013-14 and 2016-17 respectively, exhibited a turnaround to clock a positive 21.2 per cent growth. Again, valuables — the third component of GCF — changed from -42.7 percent in 2013-14 and -18.9 per cent in 2016-17 to 27.4 per cent in 2017-18. The growth in investment may simply be due to a strong statistical base effect.
Thus, the proportion of Gross Fixed Capital Formation as a percentage of GDP has actually declined from 34.1 per cent to 31.4 percent between 2013-14 and 2017-18. So have valuables, and change in stocks, albeit by a lower proportion. Consequently, overall investment rate in the economy is lower today than it was in 2013-14. Export growth, which was an important component of GDP growth in the past, may no longer provide a cushion for slowing up of the domestic economy. Growth rates of exports fell from 7.8 per cent to 4.7 per cent between 2013-14 and 2017-18 — a 3 per cent reduction in annual growth rates. The contribution of exports to GDP has fallen from about 25 per cent to less than 20 per cent in the commensurate period. This is not surprising, given the slowdown in global growth rates.
Imports of goods and services have shown a dramatic shift. Compared to a negative (-8.1 per cent) growth rate in 2013-14 over the previous year, the corresponding figure for 2017-18 was a whopping 17.6 per cent. Imports, which as a proportion of GDP had been going down in the last few years, increased between 2016-17 and 2017-18 by almost 2 percentage points. While falling crude prices have helped sustain the growth story, through reducing the import to GDP ratio, this is obviously not likely to be available.
Similarly, on the supply side, the manufacturing sector’s value added to output is a mere 24.2 per cent, as opposed to almost 70 per cent by various service sectors, as also 77 per cent by agriculture. The moral of the story: The GDP growth rates of 7.2 per cent now, versus 6.4 per cent then, hardly count. The devil is in the details. Focusing on the GDP numbers side tracks from the more important question really: What has been the quality of growth?
Tulsi Jayakumar is Professor of Economics at S.P. Jain Institute of Management & Research, Mumbai. Views are personal.
