Will the CSO revise the 'real' or inflation-adjusted GDP growth figures from 2013-14 onwards because of the new IIP series?
The Central Statistics Office (CSO) will release gross domestic product (GDP) growth estimates for 2016-17 that will factor in rebased factory output and wholesale price index (WPI) data.
Earlier this month, the released new sets of index of industrial production (IIP) and WPI data changed the base year to 2011-12 from 2004-05 earlier. It also added new categories of goods and changed weights to bring the two indices more in tune with current consumption trends.
This will likely have a bearing on the national income or GDP estimates that the CSO will release on May 31, Wednesday at 5.30 pm.
Here are four things to watch out for:
8% within reach?
Will the CSO revise the “real” or inflation-adjusted GDP growth figures from 2013-14 onwards because of the new IIP series? According to the old estimates, India’s real GDP grew 6.5 percent, 7.2 percent, 7.9 percent and 7.1 percent respectively from 2013-14 onwards. To what extent will the new IIP series force an upward revision in the earlier growth estimates? Will India’s GDP growth regain the 8 percent trajectory?
In the rebased IIP, the manufacturing sector grew 4.9 percent 2016-17 against a contraction of (-) 0.1 percent in the old series.
Simultaneously, WPI inflation is used to arrive at the real growth series from nominal data. The new WPI series is consistently weaker than the older series, pointing to small deflator values. Under the new series, WPI rose 1.7 percent in 2016-17 compared to 3.7 percent in the previous series.
A lower WPI and GDP deflator could magnify the “real” GDP growth rates, pushing it beyond 8 percent in 2016-17.
An 8 percent growth, if estimated, could draw criticism from analysts who have been arguing that demonetisation has significantly slowed down spending and investment during the third quarter (October to December 2016).
IIP and rebasing growth
IIP remains a crucial component in measuring GDP. That said, under the new GDP calculation methodology, industrial activity measured by the IIP accounts for only about 25 percent of all output.
Earlier, organised industrial activity was measured purely by IIP. It used to get updated two years later based on data coming in from the Annual Survey of Industries (ASI).
This has limitations, as ASI only captures goods’ value at the factory gate, and that too only of firms registered under the Factories Act.
Now, the corporate affairs ministry’s MCA21 records, a comprehensive compendium of balance sheet data of about 5 lakh firms, is used, along with corporate income data of all stock market listed companies. This captures value added by activities even such as marketing, which can be significant for large consumer goods companies.
There is a strand of thought that in the GDP estimates that will be released on Wednesday, the impact of a rebased IIP could be actually be limited as the estimates for the quasi corporate and unorganised sector (which accounts for only 25 percent of the manufacturing sector) will undergo revisions, while the bulk of the manufacturing sector could remain unaffected.
GVA versus GDP
All eyes will be on the government’s estimates of gross value added (GVA). The CSO could actually estimate a slower growth GVA, suggesting that deceleration is sharper than what the headline GDP growth numbers suggest. In the second advance estimates released in February, the CSO had estimated that growth in GVA, which is GDP minus net taxes, will slow down to 6.7 percent in 2016-17 or 1.1 percentage points lower than 7.8 percent GVA growth in 2015-16.
GVA serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the economy.
The demonetisation effect and the resultant slowdown in household spending and corporate investment may well be hiding in the steeper fall in GVA growth estimates compared to GDP.
Higher indirect tax collections in 2016-17 may also partly explain the more bullish GDP growth forecasts compared to GVA.
Smart rebound in Q4
Many analysts also expect the significant upward revision in the quarterly GDP growth rates, given the rebased IIP.
Analysts will be keenly watching the changes in the growth estimates for the fourth quarter (January to March 2017) from 6.8 percent projected in February and also upward revision in all the preceding three quarters from 7.2 percent, 7.4 percent and 7 percent in the first, second and third quarters respectively in 2016-17.
Besides a rebased IIP, a possible rebound in the fourth quarter can partly be attributable to remonetisation of the economy and return of cash into the system. Discretionary consumer demand held back by demonetisation appears to have bounced back in the closing months of 2016-17.Economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector, also appear to have been restored. Under these assumptions, GDP growth should rebound smartly in the fourth quarter (January to March).