Either the government believes the economic growth data that it publishes or it doesn’t.
I clearly don’t.
I had explained in yesterday’s edition of the Diary in great detail why the Indian economy couldn’t possibly be growing at more than 7%. In today’s column I get into more detail. But before I do that here is a brief recap.
Earlier this week, the Central Statistics Office (CSO) of the ministry of statistics and programme implementation published the economic growth numbers, as measured by the growth in gross domestic product (GDP).
The economic growth for this financial year (i.e. 2015-2016) is expected to be at 7.6%. This will be highest in five years. But this number is difficult to believe. Take the case of the manufacturing sector which is expected to grow at 9.5% during the course of this financial year, after growing at 5.1% in 2014-2015.
If the manufacturing is growing at such a fast pace, why are businessmen increasingly demanding sops from the government is a question worth asking. But businessmen always demand sops—it’s a part of what they do, you might tell me, dear reader.
So let’s look at some data which clearly tells us that the manufacturing sector cannot grow at 9.5% during the course of this year. Every three months the Reserve Bank of India publishes the Order Books, Inventories and Capacity Utilisation Survey (OBICUS). The OBICUS captures “actual data from the companies in the manufacturing sector,” and unlike the GDP is not a theoretical construct.
The latest OBICUS data was released in late January. The latest OBICUS “captures data for Q2:2015-16 (July to September 2016). In all, 1,104 manufacturing sector companies responded in this round of the survey. The analysis is based on the data on order books, inventory levels for raw materials & finished goods, and capacity utilisation, received from a common set of companies.”
Hence, OBICUS is a very good reflection of the real state of the Indian manufacturing sector. And things are clearly not looking good when we look at the OBICUS data. Let’s look at the capacity utilisation data, represented by the red curve in the accompanying chart (Chart 1).
The capacity utilisation as can be seen in the red curve in the chart has been falling. During the period July to September 2015, capacity utilisation stood at 70.6%. This is the second lowest number since April 2012, as can be seen from the chart.
Hence, manufacturing companies have been using a little more than two-thirds of their capacity to manufacture. And given this, how can manufacturing growth during 2015-2016 be projected to be at 9.5%, when for the first half of the year, the capacity utilisation has been very low. How can a sector which is utilising lesser production capacity than before be growing at 9.5%? Guess the mandarins at CSO need to explain that.
Now take a look at the following chart (Chart 3). This maps the finished goods inventory to sales ratio (represented by the blue curve) and raw material inventory to sales ratio (represented by the red curve).
What does this tell us? The finished goods inventory to sales ratio has been going up over the last few quarters. What does this mean? It means companies are not able to sell the goods that they have been producing at the same pace as they had in the past, leading an increase in inventory. This shows a slowdown in consumer demand.
The raw material inventory to sales ratio has also started to go up. What does this mean? It means that the inventory of the raw materials used to manufacture goods has been going up. This is but natural given that the companies haven’t been able to sell their finished goods at the same pace as they had been doing in the past.
If goods don’t sell, it is but natural that the raw materials inventory will go up immediately, as companies will manufacture lesser stuff. This also explains why the capacity utilisation rate has been falling.
Here is one more chart from the OBICUS (Chart 2). This chart deals with new orders that manufacturing companies have been receiving. As can be seen from the chart, there has been some growth in new orders in comparison to the previous quarter (represented by the blue curve). Nevertheless, in comparison to the last year, growth in new orders is more or less flat (represented by the red curve).
What all this tells us very clearly is that the manufacturing sector cannot possibly grow by 9.5% during the course of this financial year. The evidence is simply not there. Also, any growth in manufacturing would be accompanied by a growth in electricity demand and railway freight movement.
The demand for electricity between April 2015 and December 2015 has gone up by 2.6% in comparison to April and December 2014. Revenue earning railway freight has gone up 1% during the course of this financial year, in comparison to a year earlier.
Manufacturing of goods needs electricity. It also needs raw materials which are ultimately moved by the Railways. The growth in both these parameters has been marginal, then how is manufacturing expected to grow at 9.5%? Manufacturing constitutes 17.2% of the economy.
In fact, as the RBI said in its latest monetary policy statement: “Yet, still weak domestic private investment demand in a phase of balance sheet adjustments, re-emergence of concerns relating to stalled projects, excess capacity in industry, sluggish external demand conditions dampening export growth could act as headwinds.” The part in italics needs to be noted.
Now let’s take a look at financial, real estate & professional services sectors which constitute 22.3% of the overall economy. This is expected to grow at 10.3% during 2015-2016, against 11.1% in 2014-2015. Where is this growth coming from? The real estate sector in large parts of the country continues to remain in a mess. And bad loans of banks are mounting at a very rapid pace. How do you explain this disconnect?
Long story short—it is very difficult to believe the economic growth data put out by the CSO.
And this brings me to the final point—the question of whether the government believes in the economic growth data or not? If it believes in this data, then there is no way it should be entertaining thoughts of an economic stimulus to the overall economy.
Suggestions have been made in the recent past that the government needs to spend more money in order to ensure that the economic growth picks up. Nevertheless, at 7.6% India is the fastest growing major economy in the world. And why does the fastest growing economy in the world, need an economic stimulus, is a question worth asking?
The agriculture sector (actually agriculture, forestry and fishery) continues to see almost no growth at 0.6% against 0.3% in 2014-2015. Further, during the period October to December 2015, the sector actually contracted by 1%. And this is indeed worrying.
In fact, if we leave out agriculture, the non-agriculture economy is expected to grow at 8.5% during the course of this year. And that is fantastic. If after this the government entertains thoughts of an economic stimulus and decides to increase its expenditure and push up the fiscal deficit, then what they are telling us loud and clear is that they do not believe in their own economic growth data.
Neither do I.
Do you dear reader?
The column originally appeared in the Vivek Kaul Diary on February 10, 2016