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A Turning Point

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The Central Statistical Organization puts out figures of gross domestic product once a quarter, usually a couple of months after the end of the quarter. It does not identify the figures by the months they refer to; it just calls them quarter 1, 2, 3 and 4. A child used to the Gregorian calendar would think that the first quarter ran from January to March; but CSO's first quarter runs from April to June. So we may be nearing the end of the year 2011, but CSO is still in the third quarter — of the year 2011-12. Why this elongated year? Because the CSO is government, and the government's year runs from April to March. And why does it begin in April? Because it did so in British times, and the government is traditionalist except in the matter of road names, where it has replaced British names by multisyllabic names of local politicians. It is believed that some states have sometimes used the names of vernacular poets and authors. Their desire to make the dead persons better known is understandable, but since they wrote in the local vernacular, no one outside the state can read them, so for the rest of the world they remain unpronounceable names.

The CSO has just published figures of GDP for the second quarter of 2011-12, by which it means the third quarter of 2011. Its press release gives estimates of gross domestic product by productive sectors like agriculture, industry, etc., and of gross domestic expenditure by spending heads like consumption, investment, etc. The estimates are given at current prices, and at prices ruling in 2004-05; so the CSO gives four sets of figures altogether. It gives absolute figures in crores, and rates of change between the latest quarter and the quarter a year earlier — called year-on-year rates of change. The absolute figures are beyond our imagination; for example, the gross domestic expenditure in the third quarter of 2011 was 20 lakh, 85 thousand, 315 crore Rupees. So the press just picks up the growth rate at constant prices — 6.9 per cent. It has fallen — just a year earlier, it was 8.4 per cent. However, it is impossible to say how much it has fallen because the CSO keeps revising past figures. So the growth rates it announced in past press notes are no longer valid, and the currently valid growth rates are unknown because the CSO publishes only two quarters' figures for the past three years in each press release.

As a result, everyone has missed the great story emerging from the figures — CSO because it calculates nothing more than quarterly year-on-year growth rates for two quarters at a time, and the press because it reads nothing beyond what the CSO gives. The story is that there has been an enormous improvement in India's balance of payments. My reading of CSO figures would not be the same as its own reading of its figures. But for what it is, I find that exactly three years ago, the deficit was 7.7 per cent of GDP; in 2011Q3 it was 1.8 per cent. It is not a smooth, steady improvement; the deficit fluctuates a lot. But I read a clear trend.

What does this mean for growth? The payments deficit is Indian residents' purchasing power which they spend net on imports. If it goes down, it means that they have increased expenditure on domestic goods; and that must stimulate domestic production. In other words, the growth rate has fallen by 1.5 per cent in a year, but it would have fallen much more if we had not changed our export and import ratios. How much less? The ratio of balance of payments to GDP has improved approximately 3 per cent in the past year. So without it, GDP growth rate would have gone down to less than 4 per cent. To put it differently, our domestic growth rate is really down to 3 or 4 per cent; but export growth and import substitution have cushioned the impact of the fall.

The contribution of the external sector is surprising considering the fact that the western world, with which we have close external relations, is hardly growing; within it, Europe continues to have recurrent crises. What I suspect happened was that our manufacturing industry suffered a serious setback. It was growing at more than 10 per cent a year in most of 2010; during the current year, its growth has come down to close to zero. Faced by a terrible domestic market, it started looking for markets abroad and in import substitution; and we are seeing the results in payments figures. It would have done even better if we had not had such an inflation-loving government; but despite government, our industry has done a great job. Without the industrial upturn, growth would have come down to a half of what it is.

The author is Consultant Editor of Businessworld.


(This story was published in Businessworld Issue Dated 09-01-2012)