Has India’s economic growth bypassed that of China?

India is one of the fastest growing major economies in the world in recent years. One of the major reasons behind India’s growth story is the BJP-led NDA government, who claim to be the source of this major spurt in growth of GDP figures over the past couple of years.

When the BJP-led National Democratic Alliance (NDA) came into power in 2014, the GDP growth rate of India was at 7.4%. In 2015, the GDP growth rate was at a rate of 8.2% – the highest rate in five years’ time.

However, there was a dip in the GDP growth rate in 2016 and 2017, i.e. 7.1% and 6.7% respectively, as a result of demonetization shock and the hasty introduction of Goods and Service Tax (GST) in the economy.

Presently, the validity of India’s growth has been solidified by the Modi-led government’s claims that India has been on par with China with the GDP growth rate of the Indian economy being projected at 7% for the financial year 2018-19.

Open Account and Start Trading

What is Economic Growth of a country and how is it calculated?

Economic growth of a country is the cumulative addition of market value of all the goods and services produced in a country over a period of time. It is measured as the percentage increase in the real gross domestic product (GDP).

GDP is a single number which represents the monetary value of all the goods and services that are produced in a country for a specified period and all countries across the world have different methods of arriving the GDP number.

Here is a brief look at how India calculates its GDP:

Data Collection:

GDP calculation requires large amounts of data and the Central Statistics Office(CSO) is responsible for collecting macroeconomic data by conducting surveys of various industries and compilation of various indexes like Consumer Price Index (CPI) etc.

The CSOs job is to coordinate with various federal and state government agencies and other departments to collect the data required to calculate the GDP and other statistics.

For example, data points which are specific to manufacturing, crop yields, or commodities, can be used for the Wholesale Price Index (WPI) and CPI calculations, are gathered and calibrated by the Price Monitoring Cell in the Department of Consumer Affairs under the Ministry of Consumer Affairs.

All the required data points are collected and compiled at the CSO which is then used to arrive at GDP numbers.

How is GDP Calculated?

GDP is calculated using two methods:

The first method is based on economic activity based on factor cost. Factor cost is the cost incurred to produce goods and services. and the second derives GDP from market prices. Market prices are the actual selling price (for example M.R.P).

Factor Cost GDP Calculation

GDP from factor cost is derived by collecting data for the net change in the value of each sector during a given time period. The Indian government uses these 8 sectors in this cost:

  • Agriculture, forestry, and fishing
  • Manufacturing
  • Electricity, gas and water supply
  • Mining and quarrying
  • Construction
  • Financing, insurance, real estate, and business services
  • Trade, hotels, transport, and communication
  • Community, social and personal services
GDP calculation at factor cost

Here is a sample report from the second quarter of 2014 showing an overall GDP change at 6.9%

These numbers can be used by traders and investors alike to make sound investment decisions in the above sectors.

Market Prices GDP Calculation

GDP from market prices/expenditure is done by adding the domestic buying price of various goods and services produced in India for a specific period. Here is a breakdown of GDP using this method for Quater2 of 2014:

GDP calculation by Market Value

The GDP numbers may not exactly match for both these methods but they do provide a fairly good idea as to which parts of an economy contribute most to its growth.

For example, domestic household consumption which contributes 59.5% to the Indian economy is the reason why global slowdowns do not affect India.

The Controversy surrounding the GDP Data

For all the good work done by the Modi government since taking power in 2014, there are many who claim that it’s not as glorious as it is projected.

This fact has been witnessed in the woeful implementation of the demonetization exercise which crippled the poor of the country and largely failed at removing the circulation of black money from the economy, coupled with the hasty implementation of GST which has hampered businesses since its implementation.

Another criticism of the current government is the manipulation of GDP data to show an increase in growth as compared to the previous regime. Here is a look at how it works:

New Mechanism for calculating GDP

In January 2015, the Modi government revised the base year for calculating the GDP  from 2004-05 to 2011-12. This change in historical or back series data was coupled by a revamp in the methodology for calculating India’s GDP. The new series with the base year 2011-12 completely removed GDP at factor price and replaced it with Gross Value Added(GVA) which is widely accepted internationally.

Apart from that, the government has also rolled out the MCA 21 database, an e-governance initiative from the Ministry of Corporate Affairs which has allowed the seven lakh firms to electronically file their balance sheets. This database is now used for calculations.

The government has also expanded the coverage of agricultural and financial sectors, local bodies and other autonomous institutions in the new series, making it even more complicated.

The initiative to use a new series of data in place of old data seems commendable but as was the case with demonetization and GST, its implementation has not been done correctly. It is necessary to link the old and the new series of data on national income to maintain continuity in figures as these figures are the basis of policy formulation and implementation.

However, the process of creating back series data is a mammoth task due to the large complexity of data. The MCA 21 database isn’t available from 2007-08 and the data can only be accessed from 2010-11 onwards.

The National Statistical Commission (NSC) took the initiative to generate back series data for the present GDP estimates. In their draft report, it is stated that GDP estimates are not final and should not be quoted anywhere.

The report also claims that the new series is in line with the old series. This statement seems to be dubious. As per the new series, from the year 2004 to 2011 India’s growth rate has been consistently low under the rule of the UPA government which was not the case. In reality, the UPA government was able to register a higher growth rate in its first tenure as compared to the current NDA government.

This begs the question whether this new data is being used to downgrade the UPA government’s growth rate for political gains?

A prime example of this conundrum is the fact that the share of the service sector has drastically dropped from 24.7% (old series) to 17.4% (new series) which seems to be incorrect as the new MCA21 database has failed to capture the real contribution of large service sector companies to the country’s growth.

All these questions need to be answered by NSC committee and an independent review needs to be conducted on the change in GDP calculation under Modi government.

Higher expenditure for Richer states

India’s new methodology for estimating the GDP has also significantly altered the dynamics of the Gross State Domestic Product (GSDP). The changes have implications on the borrowing limits of states and the allocation of resources to these states from the Finance Commission.

The states with lower GSDP figures were hit the hardest. The government mandates the states with low GSDP to cut down on their spending and divert those funds to meet their deficit targets.

The change to the new GSDP series has led to harder budget constraints as compared to earlier regimes for the poorest states in India. Richer states have made windfall gains from the higher spending offered to them under the new series.

 Here is chart showing how the change in GSDP series has affected states across India:

GSDP , expenditure for rich and poor states of India

Is the Growth Enough?

The current NDA government has often compared its growth story with that of China while measuring the GDP growth rate. A lot of people in the fixed income and treasury markets are even happy about finally being able to supersede China’s growth rate, making India one of the fastest growing economies in the world.

But there is no escaping the fact that China has $12.04 trillion economy while India is still quite a long way behind at $2.611 trillion (2017).

Also, the Chinese economy has been growing at a double digit rate several times over the past decade which India has only been able to replicate once in 2010 (10.13%)

Yes, India’s economy has seen a good GDP growth rate under the tenures of both Dr. Manmohan and Mr. Narendra Modi with certain loopholes.

It is important to note that India is still an emerging economy with most of its urban population stuck in a middle-income trap, which it can only get out of by increasing consumption and expenditure inside its economy rather than importing products from other companies. In short, the economy is running but needs to run faster.