The Indian statistics ministry switched to market-price calculation of gross domestic product, according to which the government today said it expects economic output to grow at 7.4 percent this fiscal year (2014-15), compared to 6.9 percent in the previous year.
At this rate, India may overtake China’s growth this year itself, as the Chinese central bank has forecast growth at 7.1 percent. Defending the new methodology, former chief statistician Dr. Pronab Sen says it is a source of pride. He says it is the rebasing that has had a fairly dramatic effect. “I think what people have been missing out is that the increase in the share of manufacturing that happened when we did the rebasing of 2011-12 has had unexpected effect,” he told CNBC-TV18.
Also, in manufacturing, about 40 percent appears to be volume growth and the remainder is on the growth of value added, value added per unit of output, he adds.
However, for him, the real surprise has come from the services sector. Earlier, the various indicators used for services were essentially the total volume of physical goods which was agriculture and manufacturing. “Now we are using tax data which is actually capturing transactions,” he says.
Below is the verbatim transcript of Pronab Sen’s interview on CNBC-TV18
Latha: Your take on these numbers, they look too good to be true. We are growing at 7.4 percent, a shade faster than China?
Sen: It is a source of pride, isn’t it? I think the rebasing has had some fairly dramatic effect. I think what people have been missing out is that the increase in the share of manufacturing that happened when we did the rebasing of 2011-12 has had unexpected effect. Now on the manufacturing side in a sense I think we are using a better definition, which is we are using all value added in manufacturing enterprises rather than just the production value which is what we were doing earlier. Clearly what is happening is that the value added component is certainly growing faster than production.
The IIP I think is still a very good indicator of what is happening to levels of physical production. However, value added has other things built into it such as, what is the relative price between the outputs and the inputs. So, you can have the same output and if input prices go down the value added goes up. Then you have other forms of income that corporates have treasury income for instance and all sorts of other things that corporates do which should have always been included in manufacturing.
What is happening is very clear. The manufacturing growth you are seeing, of that somewhat less than half, about 40 percent appears to be volume growth and the remainder is on the growth of value added, value added per unit of output.
So, it means basically that what we have seen in the last two years is not too much volume growth but quite strong efficiency growth taking place in manufacturing.
The real surprise to me at least comes from the services sector. Earlier we were using various indicators for services particularly what was called the GTI which essentially is the total volume of physical goods which was agriculture and manufacturing. Now we are using tax data which is actually capturing transactions. So, it builds price into it. The tax data has shown in certain areas has shown amazing buoyancy. It hasn’t shown it all over and rightly so, excise which is linked to the physical output hasn’t done anything which is why physical output has also not done anything. However, sales tax and service tax have grown strongly. That is getting reflected in your services estimates.
Latha: If you looked at the way in which overall tax collections worked both last year and this year it doesn’t corroborate the strong manufacturing growth that these numbers throw up, don’t they?
Sen: That is going to be an issue because what this data would suggest is your corporate income tax should be growing very strongly. If I was a revenue person that is what I would look at. I think the data is consistent with the excise collection because IIP and the excise are related and I think that is coming out fairly clearly but where the rest of it will get reflected would be in corporate income tax.
Latha: So, you are saying people are not paying taxes in spite of higher value addition?
Sen: No, it is not that they are not paying taxes. I suspect what they are doing is that they are underpaying the advance tax and they will pay the tax later. So, over the next month and a half a lot of corporates are going to see the taxman knocking at their doors.
Sajjid Chinoy, JP Morgan: I think the methodology has certainly improved. I am just wondering how does one sync these real growth rates with other indications in the economy? For example if in fact manufacturing growth was much stronger we should have seen non-oil, non-gold imports pickup proportionately, auto production, auto sales number should have seen a stronger growth in that area. Are you slightly concerned that there could be some disconnect here?
Sen: No. Let us be clear, all of the indicators you are talking about are linked to volume of production. Whether you are talking about imports, whether you are talking about auto sales, whether you are talking about excise collection, it doesn’t matter. The data clearly indicates that volume production has not been high. What has been high is the value addition. So, in a sense for the same value of output you are getting higher value added.
GDP is about value added, it is not about the value of production. So, in a sense the story is not of an economy which is growing faster because output is growing faster, it is a story where incomes are growing faster because value addition is going up.
Latha: You don’t produce more number of cars, you produce superior cars, is that what you are saying?
Sen: No. You produced the same cars at lower cost. That is what it essentially says.
Shubhada Rao, Yes Bank : My question was relating to the sharp revisions in manufacturing and mining. Intuitively knowing the high frequency indications we have that ICOR’s had significantly in mining and manufacturing and juxtaposing this with the very high numbers revised upwards somewhere there is a very strong disconnect because productivity had significantly dropped in FY14, particularly these two sectors. So, how does it actually translate into much higher number?
Sen: The real problem is in mining that you are talking about. It is not so much in manufacturing. Manufacturing if you actually look at the company balance sheets what you would find is that they are actually consistent with what the numbers are saying, which is that the toplines havn’t done much but bottomlines have been healthy and growing fairly, reasonably well. That is getting reflected in your stock market valuations as well. The problem comes in mining. In mining we had been using up to now physical data from a limited number of companies which were covered by the Indian Bureau of Mines (IBM). Now what we have done is from the MCA database we are getting the results of all mining companies and the results came as a complete shocker because it really turned things from fairly substantial negative to a reasonable positive. So, clearly there is something that is happening in mining which we fully don’t understand but they are showing up in the company balance sheets.
Latha: We are more worried about what will come on February 12 in the CPI data. Are we likely to see big revisions, what should we brace ourselves for?
Sen: On CPI revisions, I do not think you should expect to see any great revisions at all. This time at least on the CPI we are doing a reasonably quick job in rebasing it. I really don’t see because ultimately it depends upon what the item basket looks like and I do not think that is going to change a whole lot. There will be a few new items, a few other items will drop out.
Latha: Is there any different weight, we are given to understand there could be higher weights for protein-based food and lower weights for cereals, anything on those lines?
Sen: Absolutely. The weights will change. It is quite clear for instance the weight of food in general will come down. Within food you will find the weight of cereals coming down and of proteins going up. So, these changes are going to be there. Possibly you will see changes in some of the services particularly education and health.
Latha: How will education and health weights change? Will they get weightier?
Sen: Yes, they will get weightier. In fact the fastest growing component of household expenditures have been in education and health. So, they are going to go up.
Latha: So, food inflation could come down but services inflation could go up?