Real growth vs. fake arguments: And never the twain shall meet

After India announced its fiscal first quarter GDP growth of 7.8%, several forecasters, including credit rating agencies, raised their forecasts for economic growth in calendar year 2023 or 2023-24. However, some commentators remain adamant that they would not let evidence interfere with prior positions. One example is ‘India’s fake growth story,’ an article published by Project Syndicate (bit.ly/44HspPN) on 6 September.

The core of that piece seems to be about this line entry called ‘statistical discrepancy.’ We will tackle that first. The design of data systems in India enables easier estimation of national income from the income side than expenditure. It is easier to estimate an entity’s income or gross value added (GVA) by taking the difference between its output and inputs than to look at output-wise expenditure in the entire economy, separating expenses on final and intermediate goods and services. The expenditure-side approach is often facilitated when more-robust income-side estimates have been obtained. It is also useful for analysing different components of demand.

In Q1 of 2023-24, the discrepancy of 2.8% has a plus sign. This indicates that the expenditure side has explained only 97.2% of the income side. It does not mean that the 2.8% that has yet to be explained does not exist. It exists and lends itself to being explained in subsequent quarters. Similarly, the preceding eight quarters have shown negative discrepancies. It means that the expenditure side has been over-explained and needs to be reconciled. Over a long period, the negatives and positives offset each other. Between 1QFY12 and 1QFY24, the CAGR of real GDP (q/q) between the two approaches (income and expenditure) was 5.3% annualized.

Therefore, the insinuation that GDP is exaggerated does not hold ground. The income side approach has not always been higher than the expenditure side. There has been a fair distribution of discrepancies since 2011-12 within a range of 6.4% to (-)4.8%. The latest quarter discrepancy lies well within that. This is easy to verify.

When statistical authorities reported a GDP contraction of around 25% in the first quarter of 2020-21, there was nary a murmur on the credibility of Indian statistics because it had reported one of the severest contractions in the history of Indian GDP data. That data suited naysayers, and hence it was ‘credible.’ As for growth data for the first quarter of 2023-24, the charge of exaggeration would have carried some conviction had GDP growth rates always been computed based on the higher of the two figures. Government statisticians have never done that. They have always reported GDP growth based on the income approach, whether it exceeded or fell short of the expenditure-based estimate.

Many agencies and consensus estimate of economists had also projected a growth rate of between 7.8% and 8.3%. The Reserve Bank of India (RBI) had anticipated 8% growth in the first quarter. High-frequency indicators such as GST collections, e-way bills, PMIs for manufacturing and services, among others, have confirmed the economy’s strong growth trajectory. The Monthly Economic Review of the Department of Economic Affairs has been recording its momentum carried forth from the final quarter of 2022-23. Data for July 2023 has also shown continued growth momentum. Private sector capital formation has begun to kick in; after contracting in 2020-21, it rose 22.4% in 2021-22 and 18.5% in 2022-23, based on the cash flow statements of a consistent sample of over 3,000 companies. RBI too noted strong investment intentions of companies in an article in its August Monthly Bulletin. RBI reiterated its expectation of 6.5% GDP growth in 2023-24. The ministry of finance too reiterated that estimate, noting that the risks to it are symmetric. Furthermore, we also believe that the growth of 7.2% for 2022-23 will be revised up when the final estimate is released early in 2026.

The balance sheet problems of the Indian corporate and financial sectors in the last decade had hampered India’s economic growth. That is now history. Banks are lending. Credit growth is in double digits. Companies are beginning to invest. India’s management of the covid pandemic without excessive fiscal and monetary loosening but with an emphasis on targeted relief and accent on public capital expenditure has provided a foundation of economic stability on which the edifice of sustained economic growth and higher living standards will rise in the coming years.