Mkt GDP sign of heavy subsidy; services-slump in line: Sen

Pronab Sen, principal adviser, Planning Commission explains on CNBC, in the light of the government revising the GDP forecast by lowering it to 5 percent on account of poor performance of the manufacturing, agriculture and services sectors, that the low GDP at market price is a sign of the injection of heavy subsidies that continue to drive the economy and consumption.

Sen adds that the fall in growth of services was in line with expectations as trade, the financial sector and real estate posted a dismal performance. Also Read: Lower economic growth forecast disappointing: Rangarajan Below is an edited transcript of the analysis on CNBC-TV18 Q: What are your first thoughts because you expected a higher estimate for the full year a turnaround from Q3? From the look of it, the Q3 estimate should be below 5 percent and Q4, because of the low base of 5.3 percent a year ago, it should be definitely higher than 5 percent and maybe a little lower than 6 percent. What is your opinion? Do you think the Central Statistics Organisation (CSO) or the street is off the mark?
A: I think the CSO is just being conservative. First, let us understand the way these numbers are generated. You have data for the first half of the year, some data for Q3 and no data for Q4. So for Q4 your projections are based essentially upon the seasonal factors that drive the system.
In a situation like this, the CSO takes the lead indicators, the primary indicator being the Index Of Industrial Production (IIP) and use it to make their forecasts. Now, factors like trade for instance are driven almost directly by IIP and agricultural data which is a huge component of services.
The second one, which in any case we were expecting a slowdown because we had prior information, was the financial sector which again accounts for nearly 10 percent of GDP. There again we know that the banks have recorded much slower growth, insurance is down. So that slowdown was also expected.
The point that I have been making is that all the data that we have for the quarterly and also for the advance estimates essentially reflects corporate behaviour. My point is that non-corporate behaviour India has been very different over the last two years than corporate. Therefore, when the annual estimates come in incorporating the small-scale data, I expect a substantial upward revision. Q: Services have been brought down considerably to 6 percent largely because of trade, hotels, transport and communication. Is the CSO very adept at calculating that and why would it mark it so much lower?
A: As I said these are synthetic calculations. Trade is linked essentially to estimates on manufacturing and agriculture. Hotels are generally linked to the overall GDP movement. So, all of these are very synthetic estimates. But the fact of the matter is that in a situation where you have a quarter-on-quarter (QoQ) slowdown, the quarterly estimates and the advanced estimates will tend to understate overall growth because you are projecting a trend. Q: Last year the advanced estimates pegged FY12 estimates at 6.9 percent when finally on May 31, it was 6.5 percent and the final estimates ten days ago it is 6.2 percent. So actually in the past, the advanced estimates overestimated. Is this 5 percent an overestimation?
A: You are getting me wrong. I said it depends upon trends. Last year, the economy in the initial phases was doing well. So when we projected that, it looked good.
The advance estimates do not pick up turning points very well. What happened last year was that in the second-half of the year, the economy slowed down very badly. Now, the advanced estimates didn’t pick that up. This year it maybe exactly the opposite which is that the economy has been slowing down and we all think that there was a pickup in late last calendar year and in the beginning of this year which again the advanced estimates will not pick up. Q: With respect to the services data, in Q1 FY13 it grew 6.9 percent, rose to 7.2 percent and averaged at around 6.6 percent for the entire fiscal. How pessimistic are you with regards to the growth of services in FY13? Do you agree of a possible slowdown to 6.6 percent as currently estimated?
A: Regarding services, I think there is cause for pessimism as trade has been adversely affected. There is almost no question that the financial sector has been affected negatively and real estate as well has been in a slump all year around. So, services were going to slowdown in any case.
But I would really like to focus on what has been projected as GDP at market prices. Q: It is just 3.3 percent. So, is it consistent?
A: Yes. So, this indicates the huge injections of subsidies that are driving the economy and consumption. This continuous worry about the subsidy bill simply going out of control has been the centre of our focus for the whole of last year. It is going to be interesting to see what happens in Q4. Q: Are you saying that this GDP at market price marked at 3.3 percent is because the CSO has factored in a move out of subsidies?
A: No, actually what has factored in the continuation and in fact an expansion of subsidies. Q: So, would it be much worse when the subsidy starts to reduce next year?
A: No, it will look a lot better. As subsidies go down, the gap between the two growth rates will reduce. Q: Would you believe that the estimated actual growth will be closer to 5 percent than to 5.5 percent?
A: No, I continue to maintain that once the final estimates come in it will be closer to 5.5 percent.