The industrial output for the month of December stood at minus 0.6 percent and for the first nine months it was 0.7 percent. Last week, the Central Statistical Organisation (CSO) announced that its forecast for the current year’s gross domestic product (GDP) is 5 percent, which was much lower than even the conservative 5.5 percent the Reserve Bank of India (RBI) forecasted recently.
After the new index of industrial production (IIP) data, achieving even 5 percent is in danger is what most economists are worried about. But Dr Saumitra Chaudhuri, member of the Planning Commission and member of the Prime Ministers Economic Advisory Council (PMEAC) is optimistic about India achieving 5 percent growth in the current year.
"The CSO forecast is on the lower side. All months or all quarters don’t have an equal weight in GDP. The 0.7 percent figure is an annuated average of the first nine months; it is not a weighted average of the first nine months. So, one would get a somewhat different outcome if it was to apply the manufacturing IIP or the modification in the IIP on to the GDP rates,” he explained.
Below is the edited transcript of Saumitra Chaudhuri’s interview with CNBC-TV18
Q: The 5 percent CSO forecast for the current year is predicated on a 1.9 percent industrial growth. If for the first nine months we have managed only 0.7 percent is this 1.9 percent in danger. If that is in danger then surely even 5 percent is not going to be possible, would you believe that, that is the case?
A: No, let me first correct your facts and then your arithmetic. The CSO would have known of the December IIP before they put out their advance estimates. Normally this data is internally finalised at the beginning of the month. So, when they did the advance estimates they would have known that number.
Secondly, all months or all quarters don’t have an equal weight in GDP. So, if you only look at the 0.7 percent figure then that is an annuated average of the first nine months, it is not a weighted average of the first nine months. So, basically one would get a somewhat different outcome if we were to apply the manufacturing IIP or the modification in the IIP on to the GDP rates.
I don’t think that the 5 percent of CSO is at stake. It is a bit on the lower side, but time will tell. We are still in the fourth quarter. December ended quarter has not been good. We are hoping that the March ended quarter will be better, but we are in the middle of it and we will have to wait and see how things eventually work out.
Q: Do you see any u-turn at all, any first signs that things are better in these six weeks than they were in the previous six months?
A: I think so. If you travel you will find the planes are full. At the end of the day you got to believe your eyes. Look at the cargo movement and passenger movement they are looking better. Coal based thermal power is growing at 14-15 percent year-on-year and is making up for shortages on the hydro side. Things are improving, may be not as much as one would like.
Q: The way the economic parameters are stacking up gives me the feeling that perhaps things are not going to get better any time soon even if they are not getting worse. Given that we don’t have stimulus on both sides and given that we know that there hasn’t been any capex from corporate side or even from household savings in terms of getting into the financial sector. Would you say that it is extremely optimistic to expect FY14 with current data to be much better than FY13?
A: I would say that it is extremely possible. In fact, certainly the next year will be better than this year.
Q: Because the base is low?
A: Not that the base is low, they are pursuing the wrong end. The current account deficit is adverse. We actually shouldn’t been having an excess demand situation in normal circumstances. But we have abnormal circumstances. Current account deficit is large because we are importing more oil than we should be doing. We are importing more gold than we should be doing. If that’s the position to start off then you are in fact going in the wrong position. The issue is as always not a demand primarily.
The demand is issue because we have monetary policy, to some extent demand destruction takes place. Ultimately this is about supply and it is about getting distortions out of the picture. Even the oil demand, net oil imports as a percentage of net oil exports that is non oil exports, it is almost 50 percent.
Therefore, every dollar that is earned exporting every other commodity but oil, almost half of it is reverted to buying net oil. We bought distortions in pricing of petroleum products which exacerbate the excess demand for petroleum products which then has an effect on external paid balance. That’s a distortion.
Here, we have the issue of supply shortages, every single short supply - coal shortage supply, power, gas, iron ore. India which is one of the world’s largest and the best reserves of iron ore, Indian steel companies are negotiating for imports because of restriction on excavating iron ore.
Then again, in 2010-11 when we were passing that year and if you look at the figures of IIP for that year, the previous year, who would have thought that we are growing at 8.6-9.3 percent. So there are lots of things that go into it. There is element of underestimation of growth. Historically, that has been in the data. We cannot be convinced that it is no longer there. So yes, we are doing badly but perhaps numbers are just overstating the case.