New Delhi: The growth of the Indian economy is projected to accelerate to 7.4% in the current fiscal compared with 6.9% last year based on a new way of calculating gross domestic product (GDP).

At this level it is estimated to be on par with China, currently the fastest growing economy in the world.

It is also the first time that the economy is projected to be bigger than $2 trillion; India’s GDP is estimated to be $2.1 trillion in 2014-15.

The data released on Monday, which paints a rather unexpectedly favourable picture of the Indian economy, has been met with scepticism, both from within and outside the government. While there is consensus that the economy is on the mend, economists are questioning the extent of recovery being posited by the new measure of GDP.

With the first three quarters’ economic growth numbers at 6.5%, 8.2% and 7.5% respectively, the data assumes that in the fourth quarter (January-March), GDP will grow at 7.5%.

The new growth numbers have been arrived at after a revision of the way GDP is calculated in India. The Central Statistics Office has revised the base year on which comparisons are made to 2011-12 from 2004-05. It has also expanded its coverage of manufacturing and included under-represented sectors and data from the corporate database of the government in arriving at the growth figure.

The data, however, maintains that gross fixed capital formation, indicative of investment demand in the economy, is set to shrink to 28.6% of GDP from 29.7% of GDP a year ago at current prices. At the same time, private consumption will improve marginally to 60.4% of GDP in 2014-15 from 59.7% of GDP a year ago.

More questions than answers

The new data series launched on 31 January for 2012-13 and 2013-14 GDP numbers has baffled analysts because of the wide variations from estimates based on the old base.

The statistics department changed the way it calculates the headline GDP growth number to GDP at market prices from GDP at factor cost to make India’s growth rates comparable internationally.

As a result, GDP growth for 2012-13 was revised from 4.7% under the old series to 5.1% in the new series, while the same data for 2013-14 was raised from 5% to 6.9% based on market prices.

GDP at market price adds taxes to and deducts subsidies on products and services from GDP at factor cost.

The latest data shows that while agriculture, mining and trade, hotels and public spending slowed in 2014-15 compared with the previous year, key sectors such as manufacturing, construction and financial sectors grew at a faster pace than a year ago.

Economists are particularly surprised at the higher sectoral numbers for the manufacturing and financial sector reported by the new series because this is not reflected in data on factory output and bank credit.

State Bank of India chief economist Soumya Kanti Ghosh said the latest set of GDP data has raised more questions than answers. “Nothing on the ground suggests the economy is growing at 7.4% rate. The number is fine if one goes by the internationally agreed standard, but one is unable to match especially the manufacturing data with the corporate sales numbers," he said.

The manufacturing sector is expected to grow at 6.8% in 2014-15 from 5.3% a year ago.

“There are still some anomalies in reconciliation of IIP (index of industrial production, a measure of factory output) data with GDP data as manufacturing shows growth of 6.8% for FY15 which looks unlikely under the IIP which will probably be between 2-3%. The difference may be attributed to the GDP being based on value-added concept while IIP is on production—though the two should ideally converge," said Madan Sabnavis, chief economist at Care Ratings.

The Reserve Bank of India in its monetary policy released last week said growth expectations should be tempered because lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand. “Domestic activity is likely to have remained subdued in Q3 of 2014-15, mainly reflecting the shortfall in the kharif harvest relative to a year ago. Agricultural growth is likely to pick up in Q4 with the late improvement in the North-East monsoon and in rabi sowing," it said.

The agriculture sector is projected to slow down to 1.1% from 3.7% a year ago.

“We may be reaching the outskirts of the woods but we are not out of the woods yet," central bank governor Raghuram Rajan said last week. “So...any data that suggests we are out of the woods at this point... (I don’t think) we would put too much weight on it."

$2 trillion economy

With nominal GDP projected at ₹ 126.5 trillion for 2014-15 from ₹ 113.4 trillion a year ago, the size of the economy is projected at $2.1 trillion at the current level of dollar exchange rate at ₹ 61.7.

At the turn of the millennium, Indian GDP was about $481 billion and by 2007, it was measured at $1.2 trillion. That means it had grown two-and-a-half times in seven years. And effectively, in a span of 14 years the Indian economy has grown more than four times.

With the latest growth number of 7.4%, however, India is tied with China as the fastest growing major economy. The International Monetary Fund had projected India to outpace China’s growth rate in 2016—India is projected to grow at 6.5% compared with 6.3% for China. However, China’s economy, at $9.5 trillion, is valued at nearly five times that of India.

The number also doesn’t mean much in terms of per capita income and India will remain a lower middle-income economy. Its economy will have to grow by at least four times and its population remain at the same level for it to become an upper middle-income economy.

According to World Bank calculations, an economy is categorized at lower middle income if its per capita income falls between $1,036 to $4,085 while upper middle income countries have per capita income between $4,086 and $12,615.

India’s per capita net national income during 2014-15 is estimated to be ₹ 88,538 ($1,434) showing a rise of 10.1% as compared with ₹ 80,388 ($1,302) during 2013-14 with the growth rate of 12.3%.

Impact on budget

The latest data projects the nominal GDP growth in this fiscal at 11.5%, lower than the budget estimate of 13.4%. This would put additional pressure on the government to achieve the 4.1% of GDP fiscal deficit for the current fiscal year ending 31 March.

However, the higher GDP numbers may come as a boon for the government while finalizing the budget figures for next fiscal. Ghosh said if the government assumes even 8% growth next fiscal along with a 5.5% inflation, a nominal growth of 13.5% will provide the necessary cushion to the government to achieve better fiscal and external sector metrics.

“Based on current year’s performance, it does look that the budget will target growth of 7.5-8% in its calculations for FY16 as the policy measures adopted and stable economic conditions will facilitate such growth next year," said Sabnavis of Care Ratings.

Finance minister Arun Jaitley will present the first full year budget of the Narendra Modi government on 28 February.

In order to maintain robust growth, India needs to address its infrastructure shortfalls, pervasive state control in business activities and unequal access to quality education, the Organization for Economic Co-operation and Development, a group of mostly rich nations, said in a report released on Monday.

“It also needs to reconsider overly stringent labour regulations which hinder job creation in the formal sector and leave most workers with no formal labour contract and social coverage," it said.

In his opening remarks at the first meeting of the Parliamentary consultative committee attached to his ministry to discuss suggestions for the budget, Jaitley said the overall economic situation in the country is looking better and basic parameters of Indian economy are moving in the right direction.

Jaitley further said that the global situation is favourable to the country as more and more investors are showing curiosity and interest in India. “The Finance Minister said that our major challenges will be to boost investment especially in infrastructure sector and give further boost to both manufacturing and agriculture sector among others," a finance ministry statement said quoting Jaitley.

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