India's GDP grew by "around" 5 percent, not 7.5 percent: Reuters Breakingviews Index

By Jag Jivan
Top international news agency Reuters' Breakingviews Index is all set to create a flutter: It has declared that one-third of India’s Gross Domestic Product (GDP) growth, as projected by Government of India, is "statistical mirage", adding, "Unless something has changed dramatically in recent years in how companies and consumers behave, the economy is more likely to be expanding at 5 percent, not the 7.5 percent claimed by the authorities."
Worked out by Andy Mukherjee, along with John Foley, the Breakingviews Index suggests that "the illusion comes from a recent supposed improvement in the way India calculates its GDP." While in theory, Indian GDP is now "closer to international standards", in practice, Mukherjee says in a Reuters blog based on the calculation he has worked out, "it has become utterly unreliable".
In fact, Mukherjee believes, depending on the make-believe 7.5 percent rate of growth could be utterly perilous: It can "easily lead India’s monetary policy astray", he underlines.
Wondering "how sluggish is the economy really?", Mukherjee says, "Breakingviews tried to answer that question by looking at three indicators: corporate earnings, auto sales and imports of computer software. The logic is straightforward: retained earnings finance new investment projects; auto sales are a proxy for consumer demand; while software imports reflect productivity gains."
"Mixing the three in a simple index suggests that growth in the most recent quarter was closer to 5 percent", Mukherjee declares, adding, "Combining indicators of demand and supply will annoy the purists." Yet, the fact is, this methodology was used in the third quarter of 2013, when the country came perilously close to a currency crisis.
"The faulty monitor continues to give misleading all-clear verdicts on the economy", Mukherjee emphasizes, adding "It’s now more than a persistent irritant. There’s a serious risk that policymakers could underestimate the output shortfall, thereby aggravating the deficit. GDP is everywhere a statistical artifact; but in India, the illusion of growth is threatening to make the reality worse than it is already."
RBI governor Raghuram Rajan has already created a stir in Indian officials close to Prime Minister Narenrda Modi by raising doubts about the strength of the economic recovery. He believes, "the economy is still below potential, output gap is still somewhat negative", adding, "Even with the 7.5% growth number, there is some discussion of how much that includes special factors in the last quarter including excise, taxes, and subsidies."
"When you subtract that, the growth in the last quarter does not look as strong as before. So you could point to those numbers also suggesting growth is weaker than at least the headline numbers suggest," Rajan has declared.

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