In a timely and very pertinent critique of the way India calculates GDP growth, one of the world’s expert economists on emerging markets has said that India’s way of calculating GDP growth is deceptive and misleading. Jahangir Aziz, chief emerging markets economist of JP Morgan Bank, says because India calculates GDP growth on a year-on-year basis, and not on a quarter-on-quarter basis, we know how the economy is performing compared to a year ago, but not compared to the last three months.
This gives us a deceptive and misleading impression because we don’t know whether the economy is accelerating or slowing down. Consequently, because we don’t know the true state of the economy, we also do not know what measures are needed to tackle it.
In a 25-minute interview to Karan Thapar for The Wire, Aziz illustrated his point with the analogy of a car whose speedometer only reflects what the speed was four hours ago rather than the actual speed of the moment. This means the car driver will not know whether he is accelerating or slowing down. Consequently, he will not know whether to apply the brake or to accelerate. Just as the driver will be acting without knowing the reality of the situation he faces, so, too, India’s government and finance ministry, in particular, take economic action and measures without knowing the true state of the economy.
Watch | ‘India’s Not in Recession but Govt Refusal to Stimulate Will Create Financial Crisis‘
In The Wire’s interview, Aziz illustrated his argument with two very telling examples.
First, he said whereas the government believes growth in Q3, calculated on a year-on-year basis, is 0.4%, his bank, JP Morgan, has done a quarter-on-quarter calculation and that shows growth in Q3 was 5.7%. Not only is that a huge difference of over 5% but it also means the government does not appreciate how well the economy performed in Q3.
Besides this point, Aziz pointed out that it is wrong to say the economy shrank by around 7.5% in Q2, which is what year-on-year comparisons lead you to believe. In fact, it grew by around 23%, which is what a quarter-on-quarter comparison would reveal. More importantly, that 23% growth in Q2 was, he said, the single highest level of growth in the world.
As Aziz pointed out, this is not something the government even seems to be aware of because they have not spoken about it. Had they known about it, they would definitely have boasted of this point.
The second illustration made by Aziz to explain why the Indian government’s way of calculating GDP growth is misleading is even more telling. He said the budget projects 11% growth on a year-on-year basis assuming inflation is 3.5% in 2021-22. He calculated that this means an “implied average quarterly pace” of 1%. That is a lot lower than the current Q3 rate of 5.7% growth. In other words, over the next financial year (2021-22), the economy is going to be slowing down, that is decelerating not accelerating. In fact, the gap between 5.7% and 1% suggests it will be slowing down fairly appreciably.
However, Aziz said this will probably not be accepted by the government and it will certainly not be known to the Indian people because the government will continue to present GDP calculations on a year-on-year basis. Such calculations (i.e. done year-on-year) will show the economy is growing at levels of 8 or 9% or possibly better. The truth, however, is that the economy will be slowing down.
This truth will only become apparent when people ask themselves the question how is it that the economy is supposed to be growing at 8 or 9% but the reality around me, that my life does not reflect that?
State of the Indian economy
Speaking generally about the state of the economy – and no longer about how GDP growth is calculated and its consequences – Aziz told The Wire the reason the economy will decelerate over the next fiscal year is because India’s growth drivers slowed down before the pandemic began and that slow down got exacerbated by the pandemic.
Today, although the industry may have recovered to 98% of its pre-pandemic level, the services sector, which is 55% of the economy, remains substantially below. Therefore, the impact of the slowdown on the economy and on employment, in particular, will be noticeable right through the next fiscal year.
Watch | ‘India Has a Very Serious Employment Crisis and the Budget’s Done Little to Tackle It’
Aziz told The Wire that neither fiscal policy nor monetary policy is designed to reverse this situation. Unless the government acts in other ways, “this makes it hard to see India’s growth engines firing on all cylinders, despite the rollout of vaccines and the anticipated surge in US growth”.
Aziz told The Wire what is needed is for the government to provide extensive and immediate income support. He said governments all over the world – he cited both the United States and Brazil – have done just this. In India, however, whatever income support was provided ended by the close of 2020 and hopes that it would be renewed in the budget were largely belied.
Finally, when asked whether, in a nutshell, he was saying the next year will not be as rosy as the government wants us to believe. Aziz said the government’s narrative, based on year-on-year calculations, will continue to suggest healthy 8-9% or higher levels of growth but the reality, which can only be derived from quarter-on-quarter calculations, will be different. However, since quarter-on-quarter calculations are not done by the government that reality will not be apparent except to those who ask why doesn’t it feel like 8% growth.
