The Bhagavad Gita | Chapter 1 : Arjuna's Despair |

Indian Economy: How is it Performing?

The health of Indian economy can be measured in multiple ways. But, each metric points in a different direction. Is it reliable to show the real picture of Indian economy?

• The Gross Domestic Product and Gross Value Added (GVA) are both above 7%, hence it can be said the economy is growing strongly.
• But, the Index of Industrial Production (IIP) has contracted for two straight months. It means that India is actually not doing so well.
• Another indicator can be corporate and personal income tax collections. But it is not necessary that they reflect true picture of government revenues.

Thus, different indicators align in different directions to conclude the health of economy. Adding to the confusion, almost every metric put out by the government is incompatible with every other metric, even if they pertain to the same sector!

Differing results

GVA and IIP

• If we compare GVA in the manufacturing sector to the manufacturing component of the IIP, at the outset, it can be said that both pertain to the manufacturing sector. But the similarity ends here.
• While the IIP Manufacturing measures gross output (the absolute amount produced by the manufacturing sector), GVA Manufacturing measures the total contribution of labour and capital in the manufacturing process. This is completely different from gross output.
• In the first quarter of financial year 2016-17, the GVA manufacturing was very robust at 9.1%. However, the IIP manufacturing component contracted by about 0.8% in the same period.
• For a common person to understand, it provides a contradictory picture. Total output is shrinking, but more value is being added to that output. How is it possible and how to determine if the sector is progressing or not?

Actual measurement

• The IIP uses the figures of 2004-05 as the base year.
• On the other side, other metrics like GDP, GVA and the inflation indices have moved to a more recent base year of 2011-12.
• Comparing the results of both the indices is not a wise choice.

Inflation

• Two sets of numbers are released every month by the government- WPI and CPI
• WPI looks at the movement of prices across various categories at the wholesale level whereas CPI looks at the movement of the prices that the consumer finally pays.
• These indices moved in tandem for a while but at the start of 2015, they began to diverge.
• In September 2015, at the height of their divergence, there was a 9 percentage point difference between the two indices. CPI was at 4.4% and WPI was near the same, but in negative.
• This does not explain how the prices in the local markets are going to act.

Tax collections

• Tax collections are also a useful metric to gauge income growth due to the assumption that if corporate and personal income goes up, then so will the government’s tax collections.
• However, it is often forgotten that only 5.5% of the earning population pays income tax. Adding to it, a large chunk of corporates gets away with paying zero tax thanks to the various exemptions and tax havens they can avail of.
• Thus, any conclusion made from tax collection may mislead where the economy is going.

Periodicity of data releases

• The data undoubtedly important for policy and transparency viewpoint and that is why government releases industrial data.
• But such an exercise and effort seems futile when it is released on monthly basis as nothing can be perceived from such small period of data.
• Instead, for a more reliable analysis, a longer period of time is required. For example data, of say, a quarter can be compared for better prediction of where the economy is heading.
• It is very difficult, time consuming to aggregate such large data of entire country’s industrial performance and agonise over monthly variations of indices.

Ending note

• The monthly figures hardly provide any inputs of economic performance. The IIP numbers since 2011 has a standard deviation of 3. It means, how much any given month’s performance can vary from the average. Such huge deviations can derive nothing when data swings so wildly on a monthly basis.
• The data collection efficiency is equally important to come at emerging economic picture. However, there is no proof that data collectors of the Ministry of Statistics are efficient enough to provide accurate data.
• Hence, there should be application of Government Inefficiency Discount to data collection as well. It will further help to know the truth of the numbers being put out.
• Thus, for now, it cannot be said how the economy is doing based on such divergent results.