Again in 2015, the Central Statistics Workplace’s apply of utilizing ‘single deflation’ as a substitute of ‘double deflation’ throughout a interval of falling commodity costs had distorted progress prints, as per our evaluation. This time, too, there appears to be some distortion in progress numbers, however for a special cause.
What’s it? The federal government’s statistics workplace reported that the economic system expanded far lower than anticipated within the third quarter (October to December 2020), and estimates that it’s going to shrink 1.1% within the fourth quarter from a 12 months in the past. This sits oddly with the high-frequency indicators we observe, which have been ticking increased. It additionally sits oddly with one other measure of progress, gross worth added (GVA), which wasn’t as weak within the third quarter and is estimated by the workplace to develop 2.5% within the fourth.
A cautious investigation reveals a brand new methodological problem within the calculation of progress that isn’t simply distorting present estimates, however may influence our knowledge for the following few years. It may even have altered progress estimates over the previous few years.
So, what’s going on right here? What’s the quantum of distortion within the numbers? And what’s the precise progress on the bottom? Allow us to clarify.
In nationwide accounting, we all know that GDP equals GVA plus oblique taxes minus subsidies. We additionally know that oblique taxes grew sharply within the third quarter. So, for GDP to develop at a a lot slower tempo than GVA, subsidies would have needed to develop strongly, and by greater than all of the pandemic-related subsidies that the federal government has introduced.
However why would that be? As a result of the price range on 1 February made all of it too clear that over the following two years, the federal government intends to repay the previous dues it owes Meals Company of India (FCI), which is the middleman for meals subsidies in India. To be exact, it goals to repay the equal of zero.9% of GDP in 2020-21 (which runs from April 2020 to March 2021), and zero.three% of GDP in 2021-22. These repayments possible resulted in bloated subsidy progress, thereby miserable third-quarter and fourth-quarter progress estimates.
However shouldn’t the GDP methodology have a strategy to deal with this with out distorting numbers? Sure, it could, if each financial entity used the identical accounting methodology. However that isn’t the case.
For simplicity’s sake, let’s take a look at FCI and the central authorities. If each did accrual accounting, we’d not have an issue. FCI would account for subsidies within the 12 months they accrued, and the federal government would account for them in the identical 12 months too. On this state of affairs, GDP could be a greater indicator of underlying progress within the economic system, fairly than GVA, as a result of it strips out the subsidy funds which are likely to inflate GVA.
The issue arises as a result of FCI and the federal government comply with totally different accounting practices: FCI does ‘accrual accounting’ whereas the federal government does ‘money accounting’. In such a state of affairs, discrepancies come up if the subsidies in FCI’s books accrued, say, final 12 months, however the authorities solely paid up within the present 12 months. To reach on the GDP quantity, the statistics workplace would find yourself subtracting from present GVA extra subsidies than what accrues within the present 12 months. This is able to result in an underestimation of GDP progress within the present 12 months.
Certainly, the statistics workplace’s 2020-21 advance estimate for GDP progress is -Eight%, decrease than the GVA advance estimate of -6.5%. About half of the 1.5 share level distinction, by our calculation, is due to distortions created by the cost of previous subsidy dues.
Had been previous-year progress numbers impacted too? In all probability, though it’s more likely to be a case of progress overestimation. The federal government has owed cash to FCI lately, and the quantity picked up quickly from 2017-18. Over this era, FCI would have accounted for the subsidies in its books (following accrual accounting), and this could present up in GVA. Nevertheless, the federal government didn’t pay up on time. As such, a smaller money subsidy quantity was deducted from GVA to reach at GDP (because the authorities does money accounting), thereby doubtlessly overstating the nation’s GDP progress in that interval.
And by how a lot may future progress numbers be impacted? The underestimation in 2020-21 GDP progress may inflate 2021-22 numbers due to a low statistical base. Nevertheless, a few of the base impact positive aspects might be offset by the steadiness cost of previous subsidy dues (budgeted at zero.three% of GDP in 2021-22), which might depress GDP (because it did in 2020-21). We’ve analysed this rigorously and discover that, on internet, the optimistic base impact overshadows the damaging cost of subsidy dues, resulting in GDP progress being overstated by 1 share level in 2021-22.
Lastly, the reimbursement of steadiness dues in 2021-22 may influence 2022-23, once more because of low base results. We calculate that GDP progress could also be overestimated by half a share level in 2022-23.
With all of this happening, what’s India’s ‘true’ financial progress? In regular occasions, GDP is a extra healthful indicator of financial progress than GVA, as a result of it contains the federal government as nicely. However with GDP impacted by the cost of previous-year subsidy dues, we expect GVA will higher replicate financial progress in 2020-21, 2021-22 and 2022-23, or till every time these puzzling GDP numbers abound.
Pranjul Bhandari is chief India economist at HSBC.