Is India's growth exaggerated?
Many experts say the economy is still waiting to gather momentum |
Last week, India announced growth figures which would
make the world envious.
Asia's third-largest economy grew 7.5% in
the three months ending in March, higher than the previous
quarter and above expectations. Forecasts were for growth of about 7.3% for the
period compared with a year earlier.
But the new growth figures have come at a time when
Indian companies are at their weakest in two years. Earnings are flat and
profits are down. Most major industries, including infrastructure and
automobiles, are struggling. Historically, says Business
Standard newspaper, when India's growth has hit 7.5% at
constant prices, corporate revenues and profits have soared above 14% on
average. So how does the economy grow so fast when corporate growth is so slow?
A month after the government declared
a new way of calculating GDP, India baffled experts in February when it
announced 7.5% growth between October and December compared with
the same period a year earlier. The latest figures again raise questions about
the new way.
Some critics say the government is raising GDP figures to
meet fiscal deficit targets, and trying to present a rosier picture of the
economy. Economists such as R Nagaraj say the new and higher figures "seem
quite at odds with other economic indicators such as growth in bank credit, the
index of industrial production and corporate performance". Even the
government's Economic Survey earlier this year found the new growth figures
"somewhat puzzling" when compared to the falling savings, investments
and exports.
India's government has defended the new way of
calculating GDP by saying it is using an improved database for the private
sector, in place of the earlier, smaller sample of large firms with high
paid-up capital. It also said it had taken into account half a million
companies which had been used for the first time in the series.
India's economy is a complex beast. There's a thriving
"underground" or black economy which evades taxes, while more than
90% of India's workers are employed by small businesses which employ less than
10 workers.
"The new methodologies are very convoluted. So far,
the increase in GDP does not appear to be reflected in the performance by
companies and the markets. So either the government was getting it wrong all
these years or they are presenting a far sunnier picture of the economy than it
actually is," says analyst Paranjoy Guha Thakurta, who has been sceptical
about the figures.
Economist Arvind Virmani calls this India's "growth
puzzle". He says this can be explained by the
"extremely dualistic nature of the Indian economy". On the one hand,
the country has a small organised sector comprising mainly large state-run
companies. On the other, it has a large, unorganised and informal sector,
catering exclusively to its vast domestic market.
Dr Virmani says the collapse of global demand and excess
capacity in goods and services have had a negative effect on globally
integrated industries in all countries. "In India it means certain high
quality, high skill segments of the organised, corporate sector. Thus Indian
corporate sector growth is likely to lag, rather than lead India's growth
recovery." - BBC Asia
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