GDP growth

The Govt Can’t Keep Driving GDP Growth

On March 1, 2017, I wrote a piece titled, Believe in Indian GDP Growth at Your Own Peril. I got many responses to the piece. Some readers, as always, accused me of being a Congressi To them I suggest please read my writing before May 2014. Also, life is not binary at the end of the day. There is a little more to it than just that.

Some others asked if I was suggesting that the government is fudging the Gross Domestic Product(GDP) data. Not at all. I have no evidence of the same. All I was saying was that there are multiple data points which show that the Indian GDP growth just did not feel right and pass the basic smell test.

During the course of last one week, the chief statistician of India, TCA Anant, has given several interviews to explain the deficiencies in the way the Indian GDP is measured. And these deficiencies I feel have led to the GDP being overreported. (I suggest that readers looking for greater detail Google up and read Anant’s interviews).

In fact, there is another point that needs to be made here. One way of measuring the GDP is through the expenditure method. This involves the summing up of private consumption expenditure, government consumption expenditure, investments and finally net exports (i.e. imports minus exports).

Now what happens if we subtract the government expenditure from the GDP number measured through the expenditure method. How much does the remaining GDP grow by? Look at Figure 1.

Figure 1 

As per Figure 1, the GDP growth without taking the government expenditure into account during the period October to December 2016 was 5.6 per cent. This was 140 basis points lower than the overall GDP growth of 7 per cent. Why has this happened?

Take a look at Figure 2. It makes for a very interesting reading. It essentially shows what portion of the increase in GDP between years comes from an increase in government expenditure.

Figure 2 

What does Figure 2 tell us? From forming next to nothing as a part of the increase in GDP between the years, for the period October to December 2016, an increase in government expenditure made up for 26.64 per cent of the increase in GDP.

Hence, for every Rs 100 increase in GDP, increase in government expenditure made up for Rs 26.64 on an average. As we can see during the course of this financial year, an increase in government expenditure has been responsible for a greater proportion of the increase in GDP.

The government spending more to get an economy out of trouble is standard operating procedure. They need to be seen to be doing something and this all they can do.

Nevertheless, there are problems with this approach. The trouble is that this way of creating economic growth by the government spending its way out of trouble, cannot continue indefinitely. At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for. Also, the multiplier effect of private expenditure is better.

If India has to continue growing at greater than 7 per cent, then investment needs to pick up and that doesn’t seem to be happening currently due to various reasons. Given that I keep discussing these reasons, I will give them a skip here.

Take a look at Figure 3. It shows the portion of the GDP formed by gross fixed capital formation, a measurement of investment.

Figure 3 

The gross fixed capital formation as a percentage of GDP has been falling over the last few years. This figure needs to start going up, if a genuine economic recovery which creates both jobs and prosperity, needs to take place. And increased government expenditure cannot do anything about this.

The column originally appeared on Equitymaster on March 7, 2017

Believe in Indian GDP Growth at Your Own Peril

cso-logo

Yesterday (i.e. February 28, 2017), the Ministry of Statistics and Programme Implementation (MOSPI), published the quarterly estimates of the Gross Domestic Product(GDP) for October to December 2016.

As per this estimate, the GDP grew by 7 per cent for the October to December 2016 period, in comparison to the same period in 2015. In fact, MOSPI estimates that the Indian GDP for 2016-2017 will grow by 7.1 per cent.

What this tells us is that there has been almost no impact of demonetisation on economic growth (as measured by GDP growth), even during the period of October to December 2016, when demonetisation happened.

The question is how believable is this? One way of measuring the GDP is through the expenditure method. Under this method, the GDP is obtained by adding private consumption expenditure, government consumption expenditure, investments and net exports (imports minus exports). The private consumption expenditure forms a bulk of the GDP measured through this method.

The interesting thing is that the private consumption expenditure (at constant prices) for the October to December 2016, rose by 10.1 per cent, in comparison to the same period in 2015. This is the second fastest rise since June 2011. The data for the new GDP series adopted in January 2015 is only available up until then. GDP at constant prices essentially takes inflation into account.

Take a look at Figure 1. It shows the one year growth rate of private consumption expenditure, over the last five years.

Figure 1 

The private consumption expenditure grew by 10.1 per cent in the October to December 2016 period. This, as mentioned earlier is the second fastest growth rate over the last five years. This seems unbelievable given that between November 9 and December 30, 2016, the currency in circulation had gown down dramatically, as Rs 500 and Rs 1,000 paper notes were demonetised and suddenly had no value.

Figure 2 shows this.

Figure 2 

With the currency under circulation crashing, there wasn’t enough currency going around to carry out transactions. A bulk of the transactions in the Indian economy are carried out in cash. As per a PwC report cash/currency accounts for 98 per cent of consumer payments by volume in India. Take a look at Figure 3.

Figure 3 

The Economic Survey of 2016-2017 points out: “The Watal Committee has recently estimated that cash accounts for about 78 percent of all consumer payments.” Hence, cash/currency accounts for bulk of consumer payments in India.

Demonetisation essentially rendered 86.4 per cent of the currency in circulation useless overnight. This made consumer transactions very difficult to carry out. While, the government did replace the money rendered useless with new money, but initially only Rs 2,000 notes made it to the financial system. These notes were very difficult to use because people found it difficult to give change, when almost no new Rs 500 notes were available. Hence, they were as good as useless for most of November and December 2016.

In this environment, how did private consumption expenditure grow by 10.1 per cent, the second fastest since June 2011, is a question worth asking?

One possibility is that people may have borrowed and bought things and in the process private consumption grew. Now take a look at Figure 4. It essentially shows the growth in retail loans given by banks between October and December across several years. Retail loans include loans given by banks to buy cars, two-wheelers, consumer durables, homes, credit card outstanding etc. They are a good measure of how robust the private consumption scene in the country is.

Figure 4

The growth in retail loans between October and December 2016 was almost flat at 0.5 per cent. This isn’t surprising given that most of the retail banking staff of banks was busy dealing with all the cash making it back to the banks because of demonetisation. What the figure also tells us is that the growth in retail loans between October to December 2016 has been the slowest in last five years.

Figure 4 clearly tells us that people did not borrow and spend between October and December 2016. So, the question is where did the growth in private consumption expenditure come about? One theory that has been offered is that many people bought a lot of gold using their old Rs 500 and Rs 1,000. The goldsmiths helped them by backdating their purchases.

This is one of those things that sounds to be true as soon as one hears it. But what does data tell us about this? India does not produce any gold of its own. If a lot of gold has been bought in this way, then the gold import numbers should go up in the months to come. The initial evidence on this front suggests otherwise.

Take a look at Figure 5.

Figure 5 

Gold imports were high in November 2016 because of the festive season as well as the marriage season. And typically gold imports are high in November. If a lot of gold was bought by those who converted their black money held in the form of old Rs 500 and Rs 1,000 notes into gold, then gold imports should have picked up in December 2016 and January 2017, but they haven’t. They are considerably lower in comparison to December 2015 and January 2016. This basically puts the gold theory out of the window.

The other theory offered in explanation to private consumption expenditure going up has been that people bought a lot of iPhones after demonetisation was announced. How can the sale of one product push up GDP numbers is beyond my comprehension, but I will not get into that. While Apples sales did go up in October (pre-demonetisation) and November (eight days with no demonetisation), the sales crashed in December because of lack of cash in the financial system.

As a newsreport in The Economic Times points out: “After a cracker of sales in October-November, which heralded strong growth for that quarter, purchases of iPhones dwindled mainly because of the lack of cash, which had fuelled buying before demonetisation. That’s forced Apple to scale down its India revenue target to $2 billion for its fiscal year (October 2016-September 2017) from $3 billion.”

Also, the sales of many consumer goods companies fell during the period. (You can read about it here).

Essentially what all this tells us is that it is very difficult to believe that private consumption expenditure grew by 10.1 per cent during October to December 2016, despite demonetisation. There is something that clearly does not add up here. In fact, take a look at Figure 6. It shows what portion of the GDP is made up by private consumption expenditure.

Figure 6 

As can be seen from Figure 6, the private consumption expenditure share in GDP is at very high levels. Also, the kind of jump seen between the period of three months ending September 2016 and the period of three months ending December 2016, has never been seen before.

And given that private consumption expenditure forms a bulk of the GDP, all in all, this tells us that there is something that just doesn’t smell right about India growing by 7 per cent in October to December 2016, when the currency situation was very tight.

The column originally appeared on Equitymaster on March 1, 2017.

Believe in Indian GDP Growth at Your Own Peril

cso-logo

Yesterday (i.e. February 28, 2017), the Ministry of Statistics and Programme Implementation (MOSPI), published the quarterly estimates of the Gross Domestic Product(GDP) for October to December 2016.

As per this estimate, the GDP grew by 7 per cent for the October to December 2016 period, in comparison to the same period in 2015. In fact, MOSPI estimates that the Indian GDP for 2016-2017 will grow by 7.1 per cent.

What this tells us is that there has been almost no impact of demonetisation on economic growth (as measured by GDP growth), even during the period of October to December 2016, when demonetisation happened.

The question is how believable is this? One way of measuring the GDP is through the expenditure method. Under this method, the GDP is obtained by adding private consumption expenditure, government consumption expenditure, investments and net exports (imports minus exports). The private consumption expenditure forms a bulk of the GDP measured through this method.

The interesting thing is that the private consumption expenditure (at constant prices) for the October to December 2016, rose by 10.1 per cent, in comparison to the same period in 2015. This is the second fastest rise since June 2011. The data for the new GDP series adopted in January 2015 is only available up until then. GDP at constant prices essentially takes inflation into account.

Take a look at Figure 1. It shows the one year growth rate of private consumption expenditure, over the last five years.

Figure 1 

The private consumption expenditure grew by 10.1 per cent in the October to December 2016 period. This, as mentioned earlier is the second fastest growth rate over the last five years. This seems unbelievable given that between November 9 and December 30, 2016, the currency in circulation had gown down dramatically, as Rs 500 and Rs 1,000 paper notes were demonetised and suddenly had no value.

Figure 2 shows this.

Figure 2 

With the currency under circulation crashing, there wasn’t enough currency going around to carry out transactions. A bulk of the transactions in the Indian economy are carried out in cash. As per a PwC report cash/currency accounts for 98 per cent of consumer payments by volume in India. Take a look at Figure 3.

Figure 3 

The Economic Survey of 2016-2017 points out: “The Watal Committee has recently estimated that cash accounts for about 78 percent of all consumer payments.” Hence, cash/currency accounts for bulk of consumer payments in India.

Demonetisation essentially rendered 86.4 per cent of the currency in circulation useless overnight. This made consumer transactions very difficult to carry out. While, the government did replace the money rendered useless with new money, but initially only Rs 2,000 notes made it to the financial system. These notes were very difficult to use because people found it difficult to give change, when almost no new Rs 500 notes were available. Hence, they were as good as useless for most of November and December 2016.

In this environment, how did private consumption expenditure grow by 10.1 per cent, the second fastest since June 2011, is a question worth asking?

One possibility is that people may have borrowed and bought things and in the process private consumption grew. Now take a look at Figure 4. It essentially shows the growth in retail loans given by banks between October and December across several years. Retail loans include loans given by banks to buy cars, two-wheelers, consumer durables, homes, credit card outstanding etc. They are a good measure of how robust the private consumption scene in the country is.

Figure 4

The growth in retail loans between October and December 2016 was almost flat at 0.5 per cent. This isn’t surprising given that most of the retail banking staff of banks was busy dealing with all the cash making it back to the banks because of demonetisation. What the figure also tells us is that the growth in retail loans between October to December 2016 has been the slowest in last five years.

Figure 4 clearly tells us that people did not borrow and spend between October and December 2016. So, the question is where did the growth in private consumption expenditure come about? One theory that has been offered is that many people bought a lot of gold using their old Rs 500 and Rs 1,000. The goldsmiths helped them by backdating their purchases.

This is one of those things that sounds to be true as soon as one hears it. But what does data tell us about this? India does not produce any gold of its own. If a lot of gold has been bought in this way, then the gold import numbers should go up in the months to come. The initial evidence on this front suggests otherwise.

Take a look at Figure 5.

Figure 5 

Gold imports were high in November 2016 because of the festive season as well as the marriage season. And typically gold imports are high in November. If a lot of gold was bought by those who converted their black money held in the form of old Rs 500 and Rs 1,000 notes into gold, then gold imports should have picked up in December 2016 and January 2017, but they haven’t. They are considerably lower in comparison to December 2015 and January 2016. This basically puts the gold theory out of the window.

The other theory offered in explanation to private consumption expenditure going up has been that people bought a lot of iPhones after demonetisation was announced. How can the sale of one product push up GDP numbers is beyond my comprehension, but I will not get into that. While Apples sales did go up in October (pre-demonetisation) and November (eight days with no demonetisation), the sales crashed in December because of lack of cash in the financial system.

As a newsreport in The Economic Times points out: “After a cracker of sales in October-November, which heralded strong growth for that quarter, purchases of iPhones dwindled mainly because of the lack of cash, which had fuelled buying before demonetisation. That’s forced Apple to scale down its India revenue target to $2 billion for its fiscal year (October 2016-September 2017) from $3 billion.”

Also, the sales of many consumer goods companies fell during the period. (You can read about it here).

Essentially what all this tells us is that it is very difficult to believe that private consumption expenditure grew by 10.1 per cent during October to December 2016, despite demonetisation. There is something that clearly does not add up here. In fact, take a look at Figure 6. It shows what portion of the GDP is made up by private consumption expenditure.

Figure 6 

As can be seen from Figure 6, the private consumption expenditure share in GDP is at very high levels. Also, the kind of jump seen between the period of three months ending September 2016 and the period of three months ending December 2016, has never been seen before.

And given that private consumption expenditure forms a bulk of the GDP, all in all, this tells us that there is something that just doesn’t smell right about India growing by 7 per cent in October to December 2016, when the currency situation was very tight.

The column originally appeared on Equitymaster on March 1, 2017.

Fiscal Deficit for First Four Months of 2016-2017 is Highest in Eight Years

At the end of every month the Controller General of Accounts (CGA) declares the fiscal deficit of the government, up until the previous month of the financial year. Fiscal deficit is the difference between what a government earns and what it spends.

Hence, as of August 31, 2016, the CGA declared the fiscal deficit number for the period April to July 2016. During the period the fiscal deficit of the central government was at Rs 3,93,487 crore. This was at 73.7 per cent of the annual target for the financial year and is the highest in eight years.

Fiscal deficit a percentage of annual target 

Take a look at the above chart. It shows the fiscal deficit as a percentage of the annual target, for the first four months of the financial year, over a period last twelve years. It is clear that only in July 2007 and July 2008, was the fiscal deficit as a percentage of the annual target, at a higher level in comparison to where it is at during the course of this financial year. The year 2008 was the year when the financial crisis started and the government tried to beat the impending slowdown by spending much more than it what normally did during the first four months of the year.

Another point that needs to be mentioned here is that expenditure of the government is front loaded whereas a major chunk of its revenues start to come in only in the second half of the year. Even with this disclaimer, the fiscal deficit for the first four months of this financial year is worrying, given that one of the biggest expenditure items of the year, the extra salaries and pensions that the government needs to pay to its current and former employees after accepting the recommendations of the Seventh Pay Commission, kicks in only from August 2016.

This higher fiscal deficit is also visible in the gross domestic product number for the first three months of the financial year (April to June 2016). One way of measuring the gross domestic product (GDP) is to calculate the total expenditure by adding the consumption expenditure, the government expenditure, investments and the net exports (exports minus imports).

For the three-month period between April to June 2016, the government expenditure went up by 18.8 per cent (in real terms). This helped the GDP grow by 7.1 per cent. Without this push from the government, the growth would have been much slower at 5.7 per cent, as per Nomura.

The trouble is that the government doesn’t have an unlimited amount of money and if it is spending money without earning it first, it’s bound to push up its fiscal deficit. A higher fiscal deficit comes with its own set of problems, from higher inflation to higher interest rates.

Further, if the government wants to achieve the fiscal deficit target of 3.5 per cent of the GDP, that it set at the time of presenting the budget, it will have to be a little more aggressive about raising its revenues.

Take the case of the disinvestment target for 2016-2017. It has been set at Rs 56,500 crore. The way it has worked in the previous years is that the government has waited all through the year for the stock market sentiment to improve. And then towards the end of the year, the Life Insurance Corporation of India, has been encouraged to buy what the government has had to sell.

In 2015-2016, of the disinvestment target of Rs 69,500 crore, only around Rs 25,312.6 crore was earned. Of this amount, a major chunk came from the Life Insurance Corporation of India. From the looks of it, something similar may happen this year as well. The Life Insurance Corporation picking up shares being sold by the government is hardly genuine disinvestment, with the money moving from one arm of the government to another.

It is worth pointing out here that timing the market by trying to sell when the stock market is peaking, is very difficult to achieve. And the same applies to the government as well. An ideal strategy would be sell the government stake in companies, little by little almost every month. This wait for the market to pick up is not the best way to operate. The moment any disinvestment of shares stops being an event, will be the day, this strategy will really take off.

Further, given its ambitions in the infrastructure sector, the Modi government needs to look at newer ways of raising revenue. One such way is by selling land. As the Economic Survey of 2015-2016 points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks.”

These land banks can then be sold in order to raise revenues for the government. This money can go into a sort of an infrastructure fund which can be used to finance the ambitious plans of the government when it comes to roads and railways.

Of course, for this to happen, the reluctance of the bureaucrats to sell land has to be overcome. This reluctance, the Economic Survey comes in large part from the “the fear of ‘causing pecuniary gain’ to the other side.” And this fear will not be so easy to get rid of.

(The column originally appeared in Vivek Kaul’s Diary on September 6, 2016)

What the GDP numbers tell us about the fiscal deficit

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The Central Statistics Office(CSO) has published the economic growth numbers for the period October to December 2015. It has also put out the economic growth projection for the current financial year i.e. 2015-2016 (April 1, 2015 to March 31, 2016).

The Indian economy grew by 7.3% during the period October to December 2015. It is projected to grow at 7.6% during 2015-2016. Economic growth is measured by the growth in the gross domestic product(GDP). But GDP is a theoretical construct. There are many high frequency economic data indicators which tell us very clearly that there is no way that the country is growing at the rate at which the government wants us to believe it is.

Much has been written about the fact that India’s economic growth numbers can’t be possibly right and given that I wanted to discuss something else, but equally important in this column.

The GDP growth is declared in several forms. When CSO talks about the Indian economy growing by 7.6%, during the course of the year, it is talking about real GDP growth. Real GDP growth is essentially adjusted for inflation. The economic growth which is not adjusted for inflation is known as the nominal GDP growth. The nominal GDP growth for the current financial year is expected to be at 8.6%. Typically, the difference between nominal and real GDP growth is greater than this.

When calculating the fiscal deficit, the government uses the nominal GDP. This is because the revenue as well as the expenditure of the government are not adjusted for the prevailing inflation. Fiscal deficit is the difference between what a government earns and what it spends during the course of the year.

When the finance minister Arun Jaitley presented the budget in last February, he had set a fiscal deficit target of 3.9% of the GDP. The GDP here is the nominal GDP. There are essentially two numbers in the fiscal deficit calculation—the absolute fiscal deficit number and the nominal GDP number.

The absolute fiscal deficit number for this year was set at Rs 5,55,649 crore. The nominal GDP number in the budget was assumed to be at Rs 14,108,945 crore. It was assumed that the nominal GDP would grow by 11.5% in comparison to the nominal GDP in 2014-2015, which was at Rs 12,653,762 crore.

The growth of 11.5% in nominal GDP has not materialised and now close to the end of this financial year, the government thinks that the nominal GDP growth will be at a much lower 8.6%. And this is precisely what has upset the fiscal deficit calculations of the government. A growth of 8.6% means that the nominal GDP for 2015-2016 will come in at Rs 13,741,986 crore.

If the government maintains an absolute fiscal deficit of Rs 5,55,649 crore, then the fiscal deficit as a proportion of the nominal GDP will come in at 4.04% of the GDP. In order to maintain the fiscal deficit at 3.9% of the GDP, the government will have to cut down the fiscal deficit by around Rs 20,000 crore, assuming all other projections remain the same.

A fiscal deficit of 4.04% of the GDP is higher than 3.90% of the GDP, but not significantly higher. But that is not what has got the government worrying. In fact, the finance minister Arun Jaitley had talked about fiscal consolidation in the two budget speeches he has made till date in July 2014 and February 2015. Fiscal consolidation is the reduction of the fiscal deficit.

In July 2014 Jaitley had said: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date.”

He had further said: “One fails only when one stops trying. My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent [of the GDP] for 2015-16 and 3 per cent for 2016-17.”

In the speech he made in February 2015, he postponed this target by a year and said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.

The point being that the government had originally envisaged achieving a fiscal deficit of 3.6% of GDP during this financial year. This target was postponed by a year and the government set itself a much easier target of 3.9% of GDP. And given this, it is very important that the government achieve this much easier target, if it wants people to take it seriously in the future on the fiscal deficit front.

Further, it is worth pointing out here that typically if the government were to follow the international norms of declaring the fiscal deficit and not include disinvestment proceeds as a revenue item but a financing item, the fiscal deficit for 2015-2016 would be at 4.4% of the GDP. Also, the 3.9% of GDP fiscal deficit target does not include subsidy payments of more than Rs 1,00,000 crore that need to be made for fertilizer and food subsidies.

The government can achieve a 3.9% of GDP fiscal deficit target, by increasing its revenue and cutting down on its expenditure. The government has been trying to increase its revenue by increasing the excise duty on petrol and diesel. Three such hikes have been made since January 2016. This has led to a situation where oil prices have fallen dramatically but petrol and diesel prices in India have actually risen over the last one year.

The petrol price in Mumbai as of now is Rs 66.05 per litre. The price as of last February was at Rs 63.9 per litre. The price of the Indian basket of crude oil during the same period has fallen by more than 44%.

While the government continues to raise the excise duty on petrol and diesel, it continues to own a 11.2% stake in cigarette maker ITC. This stake as of yesterday’s closing price was worth Rs 28,256 crore. What is so strategic about owning a stake in a cigarette company and at the same time run advertisements trying to tell the country at large that it consumption of tobacco is injurious to health? Why can’t this stake be sold and the money used for better purposes?

This is something that the government needs to explain.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on February 9, 2016.