Does the govt believe its economic data?

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

Indian Economic Growth Data Has Gone the Chinese Way—It’s Not Believable

The Central Statistics Office (CSO) has declared the economic growth, as measured by the growth in gross domestic product (GDP), for the period October to December 2015. During the period India grew by 7.3%.

The economic growth for the period July to September 2015 has also been revised to 7.7%, against the earlier 7.4%. The economic growth for the period April to June 2015 was also revised to 7.6%, against the earlier 7%.

The CSO also said that the “growth in GDP during 2015-16 is estimated at 7.6 per cent as compared to the growth rate of 7.2 per cent in 2014-15”.

The question to ask here is that why doesn’t it feel like India is growing at greater than 7%? Before I answer this question let me reproduce a paragraph from author and economic commentator Satyajit Das’ new book The Age of Stagnation: “In a 2007 conversation disclosed by WikiLeaks, Chinese premier Li Keqiang told the US ambassador that GDP statistics were ‘for reference only’. Li preferred to focus on electricity consumption, the volume of rail cargo, and the amount of loans disbursed.”

This was promptly dubbed as the Li Keqiang index, by the China watchers.

Over the years, lot of doubts have been raised about the official Chinese economic growth data. And many analysts now like to look at high speed economic indicators to figure out the ‘actual’ state of the Chinese economy.

The Indian GDP data also seems to have reached a stage where it is ‘for reference only’. And we probably now need our own version of the Li Keqiang index, to figure out how different the actual economic growth is from the official number.

It is worth understanding here that GDP ultimately is a theoretical construct. One look at the high speed economic indicators clearly tells us that India cannot be growing at greater than 7%.

Let’s first take a look at the data points that constitute the Li Keqiang index. The electricity requirement for the period April to December 2015 has gone up by only 2.5% to 8,37,958 million Kwh, in comparison to the period between April to December 2014.

How does the earlier electricity requirement data look? The electricity requirement between April to December 2014 had gone up by 8.3% to 8,16,848 Kwh, in comparison to the period April to December 2013. What this clearly tells us is that the demand for electricity has gone up by a very low 2.6% during the course of this financial year, in comparison to 8.3% a year earlier. This is a clear indicator of lack of growth in industrial demand. As industrial demand picks up, demand for electricity also has to pick up.

And how about railway freight? Between April to December 2015, revenue earning railway freight grew by 1% to 8,16,710 thousand tonnes, in comparison to April to December 2014. Between April to December 2014, revenue earning railway freight had grown by 5% to 8,08,570 thousand tonnes, in comparison to April to December 2013.

The railways transports coal, pig iron and finished steel, iron ore, cement, petroleum etc. A slow growth in railway freight is another great indicator of lack of industrial demand.

This brings us to the third economic indicator in the Li Keqiang index, which is the amount of bank loans disbursed, an indicator of both consumer as well as industrial demand. The bank loan growth for the period December 2014 to December 2015 stood at 9.2%. Between December 2013 to December 2014 the loan growth had stood at a more or less similar 9.5%. Bank loan growth has been in single digits for quite some time now. In fact, growth in loans given to industries stood at 5.3% between December 2014 and December 2015.

And what is worrying is that bad loans of banks have jumped up. Bad loans of banks stood at 5.1% of total advances as on September 30, 2015, having jumped from 4.6% as on March 31, 2015. The stressed loans of public sector banks as on September 30, 2015, stood at 14.2% of the total loans.

Hence, for every Rs 100 of loans given by public sector banks, Rs 14.2 has either been declared to be a bad loan or has been restructured. In March 2015, the stressed assets were at 13.15%.

Estimates suggest that over the last few years nearly 40% of restructured loans have gone bad. This clearly means that banks have been using this route to kick the bad loan can down the road. It also means that many restructured loans will go bad in the time to come.

Hence, the Indian economic growth story is looking ‘really’ weak when we look at the economic indicators in the Li Keqiang index. There are other high frequency economic indicators which tell us clearly that economic growth continues to be weak.

Exports have been falling for 13 months in a row. Between April and December 2015, exports fell by 18% to $196.6 billion. Non petroleum exports between April and December 2015 were down by 9.4% to $173.3 billion. The bigger point is that is how can the economy grow at greater than 7%, when the exports have fallen by 18%? In 2011-2012, exports grew by 21% to $303.7 billion. The GDP growth for that year was 6.5%. How does one explain this dichotomy?

Between April and December 2015, two wheeler sales went up by 1.05% to 1.42 crore, in comparison to a year earlier. Two-wheeler sales are an excellent indicator of consumer demand throughout the country. And given that the growth has been just 1.05%, it is a very clear indicator of overall consumer demand remaining weak.

In fact, the rural urban disconnect is clearly visible here. Motorcycle sales are down by 2.3% to 97.61 lakhs. Scooter sales are up 11.5% to 39 lakhs. Scooters are more of an urban product than a rural one. This is a clear indicator of weak consumer economic demand in rural and semi-urban parts of the country. Tractor sales fell by 13.1% between April to December 2015 to 4.12 lakh. This is another  indicator of the bad state of rural consumer demand.

One data point which has looked robust is the new car sales data. New car sales during the period April to December 2015, grew by 7.9% to 19.22 lakhs, in comparison to a year earlier. Between April to December 2014, new car sales had grown by 3.6% to 17.82 lakhs. The pickup in new car sales is a good indicator of robust consumer demand in urban areas.

Over and above this, not surprisingly, corporate earnings continue to remain dismal. If all the data that I have pointed up until now was positive, corporate earnings would have also been good.

The larger point is that if so many high frequency economic indicators are not in a good state, how is the economy growing at greater than 7% and how is it expected to grow by 7.6% during the course of this year. What is creating economic growth?

It is worth pointing out here that sometime early last year, the CSO moved to a new method of calculating the GDP. Since then robust economic growth numbers have been coming out, though the performance of high frequency economic indicators continues to remain bad. In fact, some economists have measured the economic growth rate between April and September 2015, as per the old method, and come to the conclusion that the growth is in the range of 5-5.2%, which sounds a little more believable.

To conclude, there is no way the Indian economy can possibly be growing at greater than 7%. Honestly, Indian economic growth data now seems to have gone the Chinese way—it’s totally unbelievable. And since we like to compete with the Chinese, at least on one count we are getting closer to them.

And there is more to come on this front in the time to come.

Stay tuned!

The column was originally published on the Vivek Kaul Diary on February 9, 2016