India’s bragging rights for growing faster than China, making it the world’s fastest growing major economy, have taken a severe knock as even its already dubious official growth figures are now betraying signs of a slowdown.
The latest numbers published for the April-June quarter show gross domestic product (GDP) is growing at an annualised 7.1 per cent, a sharp drop from 7.9 per cent in the previous quarter. This is the slowest growth rate in five quarters.
China is projected to end 2016 with a growth rate of 6.7 per cent, impressive for a US$11.4 trillion giant that’s nearly five times bigger than India’s US$2.3 trillion economy.
According to Ritika Manka Mukherjee of Ambit Capital, India would grow no more than 6.8 per cent in 2015-16, well short of the government’s projection of 7.6 per cent, and would be stuck with the same pace for the current fiscal year of 2016-17 to March 2017.
“We don’t expect growth to accelerate because of three drags. One, moderate or slowing government and private investment; two, reduced private equity or venture capital inflows; and three, suffocation in bank lending to the economy.”
Like China’s, India’s official growth figures themselves are considered by many as grossly inflated, meaning the economy could actually be growing at a far slower pace. Among those who doubt the official numbers is Ruchir Sharma, chief global strategist at Morgan Stanley.
Sharma has been sceptical about India’s figures since the government claimed 7 per cent growth for 2014-15. Sharma called it, “a bad joke, smashing India’s credibility and making its statistics bureau a laughing stock in global financial circles”.
GDP is the sum of public and private consumption, investment, government spending and net exports. Individually, these don’t add up to New Delhi’s claims. Exports are weak, industry and earnings growth sluggish, investments have declined and consumption is flat.
The fall in rural demand, after two successive years of drought and a patchy monsoon this year, is reflected in the results of HUL, the local arm of Unilever, the largest seller of fast-moving consumer goods like soaps and shampoo. For two successive quarters, its volume growth has been a tepid 4 per cent.
New Delhi acknowledges that investment has slumped from its 32 per cent-plus peak during 2014, to less than 28 per cent of GDP. This reflects a deeper malaise: falling investment reflects pessimism about the future.
Rail freight shrank 13.5 per cent to its all-time low by April this year and again by 7 per cent in July. Compare this to the near 10 per cent growth levels in 2011. India’s rail system carries most of the bulk goods that drive the economy, including fertiliser, coal, grain, cement, steel and ores, making freight an important indicator of the economy’s health.
India is also staring at a huge financial crisis. According to IMF data released in May, India’s banks have the largest amount of bad debt to total lending – at 5.9 per cent – among all Asian nations. That compares with China’s 1.5 per cent and Korea’s 0.6 per cent. Consequently, lending has dried up, hampering growth.
Doubts over official numbers have emerged since the Narendra Modi government decided last year to count GDP based on Gross Value Added (GVA) at market price rather than factor cost, and changed the base year of GDP calculation to 2011-12 from 2004-05. The new methodology raised India’s growth to 7.3 per cent in 2015 fiscal year compared with 5.5 per cent under the previous system.
India’s GDP breakdown has also seen an extraordinary jump in an item called “discrepancies”, confounding economists. “Discrepancies” contributed 51 per cent of the growth in the March quarter. Without these “discrepancies”, India’s growth at constant prices is estimated to have been just 3.9 per cent rather than 7.9 per cent.
This is the reason why this July, the US State Department in its “Investment Climate Statements for 2016” report said India’s 7.5 per cent growth is “overstated” and that the Modi government had failed to match “rhetoric” with reform.
Modi’s Hindu nationalist Bharatiya Janata Party (BJP) came to power in 2014 largely on the promise of turning around a moribund economy.
Even outgoing central bank governor Raghuram Rajan, has expressed scepticism about growth numbers. “We have to be careful about how we calculate these figures,” he was quoted by the Indian press as saying in January. “If mother A went to look after the children of mother B and mother B went to look after the children of mother A, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off?”
But Pronab Sen, the country’s former chief statistician, defended the numbers. “India has a decentralised statistical system in which nearly 40 central ministries or departments collect data, and every state has its own data collection system. With such a diffuse structure, it is impossible to ensure data integrity across the full spectrum,” he said, insisting there were enough checks and balances to ensure data integrity.
Abheek Barman is a journalist based in New Delhi