India's Statistics Office announced on Friday, January 27, the rebasing and revision of historical GDP data for measuring national accounts. The government also introduced the new concepts like Gross Value Added (GVA) to the economy, with the changes aimed at improving the "ease of understanding (data) for analysis and facilitate international compatibility," said a press release.
As a result, GDP growth using the factor cost approach in the 2012-13 fiscal year (FY) was revised up from 4.5 percent to 4.9 percent. Growth for FY 13-14 was adjusted to 6.6 percent, up from an estimated 4.7 percent. Using market prices, GDP grew by an even faster 6.9 percent in FY 13-14, up from 5.1 percent. At first sight it appears that South Asia's largest economy is much stronger than previously assumed.
But Shilan Shah, India economist at Capital Economics, says in a DW interview that the faster growth rates do not square with other indicators showing continued economic weakness.
DW: What do the revised data mean for the Indian economy in macroeconomic terms?
Shilan Shah: Much of the initial comment has suggested that the revisions have boosted the size of nominal GDP, which in turn would imply a smaller current account deficit, and a healthier fiscal position. But this doesn't appear to be the case. In fact, nominal GDP in FY 13-14 is virtually identical under the new methodology as under the old (a difference of 0.1 percent). However, if the faster growth rates are correct, this implies that there is much less slack in the economy than initially thought. This would, in theory at least, limit the scope for policy loosening.
What key changes were implemented in the revision?
Two key changes have been implemented. First, the base year for real GDP has been moved from FY 04-05 to FY 11-12. The data should now more accurately reflect the true structure of the economy. Second, according to the Statistics Office, the survey techniques used to estimate GDP have been extended and improved, although full details aren't going to be made available until the end of February. In addition, the Statistics Office has announced that it now intends to use the lesser-cited GDP by market price series in future GDP releases, to bring it in line with international conventions.
Are the new GDP data consistent with other economic indicators?
The revisions are difficult to square with other indicators pointing to continued slack in the economy. Even if we discard the industrial production data - which presumably now also need rebasing - soft survey data show that capacity utilization is low. There is plenty of evidence in the hard data too.
For example, vehicle sales contracted by nearly seven percent in the past fiscal year. The revisions also jar with movements in the current account deficit, which narrowed sharply in FY 13-14.
Admittedly, this was in part due to the imposition of gold import restrictions as policymakers aimed to fend off a currency crisis. But imports more generally also fell sharply in this period, suggesting a cooling-off in domestic demand. It is extremely rare for an economy to record such as sharp pick-up in growth even as domestic demand slowed so dramatically.
What effect is this likely to have on the markets and the Reserve Bank of India (RBI) policies?
Given the lack of data for this fiscal year, and the fact that key ratios such as the current account deficit won't have changed, the market implications should be relatively small. Meanwhile, the RBI kept interest rates on hold today, but we suspect that this was more due to the timing of the budget rather than to do with the GDP revisions. With other indicators showing increasing slack in the economy, further interest rate cuts are still likely over the next year or so.
Shilan Shah is India economist at Capital Economics, a UK-based economic research consultancy.