The current phase of growth slowdown is traced to the year 2011-12 when, going by the CSO data, GDP growth decelerated sharply to 6.2% from 9.3% the previous year; led by the near-collapse of manufacturing sector to 2.3% from 9.7% in 2010-11. Experts built up a near-consensus view that the slowdown was largely domestic in nature; the hypothesis that gained currency was policy paralysis in government as the core concern. Government?s defense that slowdown was triggered by external factors had no takers as CSO?s first revised (1st RE) data revealed the fall was largely concentrated in mining, manufacturing and infrastructure sub-sectors, which had become the victim of government?s policy inaction.
The recently released second revised estimates (2nd RE), that include the results of Annual Survey of Industry (ASI) and other sources, however, seem to have turned the narrative upside down. GDP growth for 2011-12 was scaled up to 6.7% in 2nd RE, from 6.2% in the 1st RE that was published in January 2013. An upward revision of ? a percentage point is not a big deal, going by past revisions. And if one were to factor in the 40 bps downward revision in the final data for 2010-11, from 9.3% to 8.9%, the net revision could in fact be minimal.
This could lead most to gloss over these numbers and revisions and move on. But the real story lies underneath, at the sub-sector level where the scale of revisions is simply astounding! The sharp upward revision in the growth of those very sub-sectors debunks the popular ?policy paralysis? narrative, and if any, gives some credence to the government?s contention that the growth slowdown was largely caused by external factors.
Let us take the GDP components one by one and work through the revisions.
* Agriculture, which was estimated to have grown 3.6% in 2011-12 (1st RE) in January 2013, is now revised up to 5%. A 5% growth, upon an exceptional 8.6% in 2010-11, is a strong performance.
* Mining, earlier estimated to have contracted -0.06%, is now revised to show a 0.1% growth. Given court ban on mining in several states, this was no surprise.
* Manufacturing, significant for its employment linkages, has been revised a hefty 4.7 points?from 2.7% growth measured as on January 2013 to a healthy 7.4% in 2011-12. Given that this came on top of an even more buoyant 8.9% growth in manufacturing sector, this too makes for a creditable performance record.
* Electricity, gas and water supply output has been revised up nearly 2 points, from 6.5% to 8.4%, which is wonderful because this represents a big increase over the 5.3% growth in the sector in 2010-11. That?s evidence of supply response!
* Construction segment, again important for its employment capacity, is now estimated to have grown 10.8% or almost double the 5.6% measured earlier! That this increase is also double the 5.7% growth in 2010-11 questions the sureness of ?infrastructure-related constraints induced by policy paralysis? argument.
* Industry-plus-construction sector growth is now a revised 7.8%, as per the 2nd RE. This is more than double that estimated in the 1st RE (3.5%) and even a bit higher than the 7.6% growth of industry-plus-construction in 2010-11.
* The services sector turns out to be the real culprit underlying the slowdown! Excluding construction, the sector cranked down to 6.6% in 2011-12, from the buoyant 9.7% in 2010-11.
Within services sector, growth in trade, hotel and restaurant sub-component was revised down to 1.2% in 2nd RE, from 6.0% in the 1st RE, a sharp fall from the 12% growth in this segment in 2010-11.
To sum it up, these numbers demonstrate beyond doubt (accompanying table gives details) that the source of the 2011-12 growth slowdown was not agriculture, not manufacturing, not construction and not even infrastructure! Why blame policy paralysis? Slowdown, if any, was confined to services sector, largely exaggerated by a steep decline in one sub-sector?trade, hotel and restaurant?that is not even remotely connected to any government policy action!
While the government would surely rue the fact that the revised data comes two years too late to its rescue, analysts can still argue that the government doesn?t escape the reality of a growth slowdown in 2011-12. A growth rate of 6.7% in that year is a full 2.2 percentage point lower than the 8.9% growth in 2010-11 after all and it is certainly much lower than India?s estimated potential growth of 8-8.5%. For, in macroeconomic analysis, it is aggregate demand that matters and if a sharp upward revision in secondary sector growth was mostly neutralised by an equally sharp downward revision in the services, or tertiary sector, why should it make a difference?
We would, however, refrain from attributing a term like ?general slowdown? in growth outcome in 2011-12, as the fall was mostly caused by a single sub-sector of services activities?trade, hotel and restaurant?which witnessed a near collapse. Had the sector sustained its average growth rate of around 10%, the overall GDP growth would then have been 8.2%, i.e., within the bounds of India?s growth potential. As we still don?t quite know why growth in this particular sector came to such a standstill, and that the CSO will have another round of revision to 2011-12 growth data, we would prefer caution until a credible explanation emerges. But going forward, if the CSO were to maintain the same growth outcome, we would conjecture that the slowdown in this sub-sector could at best to attributed to overall pessimism that clouded the global environment in that year?a year of US ratings? downgrade, renewed Euro area concerns, lowered global demand and intense financial volatility. Ironically, the government had said so, but no one believed!
In conclusion, it must be said such extraordinary revisions in national income data two years down the line will not amuse any policy maker if the narratives of growth dynamics were to undergo such radical changes. Surely it would not extend any relief to a government that was fighting a persistent battle to ward off a perception of policy paralysis, a perception that gained currency with such sureness that it reached a crescendo against the government within the country, resonated internationally as a of gloom-doom stories emerged about the country, and who knows, might even have induced a self-fulfilling prophecy upon investment sentiments. And for a central banker constantly in search for more reliable data to assess supply-demand conditions, the job becomes that much more complex as lead indicators like the IIP and quarterly GDP turn out to be wide off-the-mark.
The author is a New Delhi-based macroeconomist
