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RBI's new GDP template: The 12 enablers of India's growth makeover

The new method to calculate GDP includes dynamic indicators like Sensex & nominal effective exchange rate.

, ET Online|
Last Updated: Feb 26, 2020, 02.58 PM IST
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The GDP series has been revised and rebased in India from time to time.
Continuing a sordid six-quarter trend, India's economy grew at just 4.5% in Q2 of the current fiscal. One tepid quarter more, and it will become the longest spell in over two decades of shrunken growth for the country.

India's GDP grew at 5 per cent in the first quarter of FY20, the slowest pace in six years. Nominal GDP growth, a measure of GDP without adjusting for inflation, rose just 8 per cent, the lowest in the last 7 years, indicating a deep slowdown.

All data sets point to a serious slowdown that just refuses to let up. Growth has plunged to multi-year lows and demand has collapsed. The fall of consumption, the bedrock of growth in the past few years, has been particularly stark — it plunged to an 18-quarter low of 3.1 per cent from 10.6 per cent in the March quarter.

The persistent slack has flummoxed the backers of the govt's recent structural reforms which they thought would be enough to engineer a turnaround. Even RBI governor Shaktikanta Das himself, in an interview last year, had admitted that Q1 GDP growth of 5 per cent came as a surprise as it was way lower than expected.

The lukewarm impact of these reforms could be primarily because structural changes take time to reflect on the ground, economists say. It basically means that the outcome of the steps being taken today will only show up in the growth numbers of the future.

What, then, is the logical way to settle this bitter growth debate where the govt insists it is doing all it can, and detractors dismiss almost every move the govt makes?

The answer may lie in an RBI working paper that has come up with a new method of calculating India's growth.

Nowcasting Indian GDP growth
The GDP series has been revised and rebased in India from time to time. Most recently, in 2018, the Ministry of Statistics and Programme Implementation released the annual back series of data beginning 2004-05 (at 2011-12 prices).

In December, the government was considering moving to the chain base method of calculating GDP, from the current practice of a fixed base year to better reflect changes in the economy and prevent controversies.

The paper introduces the Dynamic Factor Model of calculating GDP, using twelve indicators like Sensex, non-food credit and the nominal effective exchange rate, in addition to industrial production, car sales, trade numbers and others.

The high-frequency monthly series associated with industry and construction block is IIP — core industries. Personal income and consumption block is represented by indicators such as IIP-consumer goods and auto sales. Exports, non-oil and non-gold imports and foreign tourist arrivals represent the external sector block. Rail freight, air cargo and government revenue receipts represent services and miscellaneous economic activity, respectively.

Calling real-time growth assessment the need of the hour, the paper noted that "emerging market economies face serious problems of data lags, gaps and revisions which hamstring optimal policy decisions."

The Twelve Indicators
Index of industrial production(IIP) –consumer goods
IIP- core sectors
Automobile sales
Non-oil non-gold imports
Exports
Rail freight
Air cargo
Foreign tourist inflows
Government tax receipts
Nominal Effective Exchange Rate (NEER)
Sensex
Bank credit

The challenge of using high frequency indicators, however, is two-pronged, the paper notes. The first is the choice of appropriate indicators from a large pool of potential indicators. Secondly, individual indicators may reflect short-term idiosyncrasies rather than an underlying general trend.

A core concern in policy-making has been identifying signs of expansions and contractions in economic activity. At any point in time, diverse economic activity indicators may indicate mixed trends. So, in such a scenario, combining such indicators could help the RBI provide a more wholesome picture of the state of the economy.

What to expect this Friday
Economic growth will likely be accelerated in the October-December period after its weakest expansion in over six years in the previous quarter, a Reuters poll showed, with a small rebound in rural demand and private consumption expected.

Annual gross domestic product growth likely rose to 4.7% in the last quarter of 2019 from 4.5% the previous quarter, when the growth rate appears to have bottomed out, the poll found.

About 90% of economists in the poll forecast growth for the October-December quarter at 5% or below.

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