The Truth That GDP Figures Conceal

The quick estimated growth rate of GDP for the second quarter (Q2) of 2017-18, has been declared as 6.3%, compared to 5.7% of the previous quarter (Q1). This is seen by many, including Mr Jaitley, as a sign that India’s economic growth is back on track. According to Mr Jaitley, the days of demonetisation are behind us and the trend of growth slowdown of the past five quarters has been reversed.

In light of this new growth rate, should an ordinary Indian feel optimistic? Maybe not. A closer look at the sectoral contribution to Gross Value Added does not make for as good a picture as the 6.3% GDP growth rate indicates.

The growth rate of gross value added (GVA) in agriculture fell from 2.3% in the first quarter to 1.7% in the second quarter. With close to half of India’s workers dependent on agriculture, such a fall in growth rate does not bode well for the livelihoods of these workers.

The growth rate of services like trade, travel, hotel, etc. fell from 11.1% to 9.9% between the first and second quarter of 2017-18. Similarly, the growth rate of financial, insurance, real estate and professional services fell from 6.4% to 5.7%. These two service sectors together account for 40% of non-agricultural employment in India.

What this effectively means is that growth of these two sectors which together employ 70% of India’s workforce, has slowed down in the second quarter.

The construction sector, which is another larger employer – 10.6% of total workforce – has seen a slight increase of GVA from 2% to 2.6%. Though this is a small increase, a growth rate of 2.6% is nothing to be optimistic about, and definitely not a sign of some great recovery. Considering the massive damage that has been done to this sector by demonetisation, 2.6% of growth is a highly inadequate compensation.

The recovery of growth in the second quarter, compared to the first, mostly owes its growth to the manufacturing sector, which contributes to about 18% of the total GVA and employs about 12% of the workforce. The growth rate for this sector increased from 1.2% in the first quarter to 7% in the second quarter. That is indeed a substantial increase.

But, as it has been pointed out by many, there are serious problems with the new methodology of the CSO in estimating the GVA of the manufacturing sector. The growth rates of the manufacturing sector as calculated by the CSO seem to be much higher than what the IIP (Index of Industrial Production) numbers indicate. If we look at the IIP, the growth rate of manufacturing output, rose modestly from 1.1% in the first quarter to 2.2% in the second quarter. This is a far cry from the substantial increase in the GVA growth rate from 1.2% to 7%.

Moreover, according to the revised methodology, a large part of the manufacturing sector (70%) is estimated based on the accounts of listed corporates on the stock exchanges (BSE/NSE) and not based on the actual output at the factory by these companies. This will clearly overestimate the manufacturing GVA of these companies since many of these corporates have a variety of income sources other than manufacturing.

The manufacturing GVA of unorganised sector is estimated based on the IIP numbers. Since the IIP does not make a distinction between organised and unorganised sector, a growth rate arrived at this way also has a strong likelihood of overestimating the GVA of the manufacturing in this sector, which tends to be labour intensive and employs more workers than its share in the total production indicates.

As a result, this new methodology very likely underestimates the damage that has been done to the unorganised sector due to the GST and the prolonged negative effects of the demonetisation. As a result, there is a definite possibility of job loss in this sector that is hidden by the glossy growth rate.

After looking at the individual sectors, it is clear, there is nothing for an ordinary Indian to be optimistic about the 6.3% growth rate in the second quarter. Any recovery this number indicates is solely for the corporate sector, whose profits have been increasing off late.