India's growth beats China's ... or does
it? By Indrajit Basu
KOLKATA
- In what has become a routine feature over the past
nine months in the run up to India's general elections
scheduled from April 10, here's yet another piece of
good news; startling in fact. The latest data released
by the country's federal data monitoring outfit, the
Central Statistical Organization (CSO), revealed that
India's gross domestic product (GDP) grew at a scorching
10.4 percent during October-December 2003 for fiscal
year 2004, finally overtaking China (whose US$1.4
trillion economy grew 9.1 percent in 2003), as the
fastest growing economy in the world. The growth rate
was not only the fastest rate on record for India, it
also beats China's growth in any quarter over the past
eight years.
CSO said that the $547 billion
economy's double-digit growth comes on the back of a
robust 16.9 percent growth in agriculture, forestry and
fishing and a 13.1 percent growth in trade, hotels,
transport and communications over the corresponding
period in the previous fiscal. This is over and above
the growth rates of 5.7 percent and 8.4 percent for the
first and second quarters, respectively. The cumulative
average growth for April-December 2003, thus, works out
to 8.2 percent, compared with 4.1 percent for the
corresponding three quarters of the previous year.
However, in what is not a routine feature
though, this unprecedented event was greeted with a fair
amount of skepticism from economists and experts who
have responded to the CSO figures with doubt,
uncertainty, and even outright disbelief.
"Much
of the 10.4 percent growth in third-quarter gross
domestic product ... has coincided with national
elections that will be held this month," said a comment
from The Financial Times, while an editorial of India's
largest financial daily The Economic Times said, "one
can dispute how much of this stellar performance has to
do with the hand of god and how much with the policies
of the present government. But there's no denying that
the timing, in any case, has nothing to do with god.
Rather it has everything to do with clever politics."
Or, to put it bluntly, as an article in the
English daily The Telegraph said: "The unusually high
GDP growth seems like more of a slight sleight of hand
with national statistics. The statistical jugglery came
almost as an encore to the ruling Bharatiya Janata
Party's 'Vision' document released on Tuesday which
promised a double-digit GDP growth target for the
nation." The paper also quoted a finance ministry
official's admission that the latest growth surge comes
on the back of an earlier little-noticed move which
brought down estimates for 2002-03 GDP growth just two
months back to 4 percent. "Top finance ministry
officials admitted the downward revision meant a lower
base that saw GDP projections for this fiscal especially
for the third quarter going up," it said.
Indeed, there are reasons to be skeptical about
India suddenly hitting the economic super highway.
According to experts, "not only are India's economic
predictions often made with unreliable data", local
political leadership heavily influences local data
gathering offices.
Moreover, according to S L
Rao, an economist and chairman of Institute for Social
and Economic Change, "Since the CSO is under the
administrative control of the government, there is
always a suspicion that the CSO tailors its estimates
and forecasts to suit the needs of the party in
government; in this case, the Bharatiya Janata Party-led
government. It has been many times recommended that
statistics should be neutral and reflect the best
reality that can be estimated. But no government in
India has accepted this argument."
Admittedly,
CSO's data is scarcely up to date: its gathering system
revises its measurements of the different sectors many
years after a year has ended and has no mechanism to get
comprehensive and reliable measurements at the end of a
quarter.
Rao also says that the CSO estimate for
a quarter never does the "smoothing out" of the cyclical
variations in many sectors of the economy. "For
instance, if growth in the harvest quarters and not
those in between were given due regard, the off-harvest
quarters would show substantial decline," says Rao.
"Similarly, demand for many industrial products is also
seasonal. This is also true of services like hotels and
even some financial services. If there were to be wide
variations in each quarter, the resulting figures could
cause panic. Thus the data on which estimates are made
is based on incomplete and inconsistent measurements,"
Rao concluded adding, "Because the estimates too guess
the numbers for many sub-sectors."
But the moot
question is, even if India's figures are suspect, to
what extent are China's GDP growth figures genuine?
After all, China, too, has been accused regularly over
the past few years for "cooking its books and falsifying
figures", while its National Statistical Bureau has been
struggling laboriously over the past several years to
upgrade its system of calculating growth. According to
the director of China's National Bureau Li Deshui's own
acknowledgement, China will need to carry out a series
of measures to improve and standardize the regional GDP
accounting from the year of 2004.
Nonetheless,
although Indian Finance Minister Jaswant Singh says with
his usual dose of confidence that, "India is now poised
for explosive growth and that this demonstration of
double digit growth for the third quarter is definitely
a forerunner of things to come", few agree that
"double-digit growth" is sustainable.
"First,"
says Subir Gokarn, chief economist of Credit Rating
Information Services of India Limited, "there is little
chance of the economy sustaining a double-digit growth
rate in 2004-05 as the magic of a good farm growth -
which accounts for about 65 percent of the country's
economy - may not work twice." In fact a closer look at
the figures reveals that the spectacular growth in the
farm sector is mainly on account of a negative 9.8
percent growth registered in the corresponding [quarter
3] period of 2002-03 because of bad monsoon. In fact, if
the agriculture performance of Q3 of 2003-04 is compared
with the performance of the sector in the corresponding
period of 2001-02, the growth shrinks to just 5.4
percent.
Second, the latest seemingly
irreversible trend of the hardening rupee against the
dollar could spoil the show. India's currency that has
been gaining strength relentlessly since June 2002 hit a
four-year high last week (Rs 43.60/43.65 to US$1) and
has already climbed by an unprecedented 9 percent in the
last financial year. It seems set to climb further in
the coming weeks. The country's federal bank, the
Reserve Bank of India (RBI), which has been trying to
hold back the rise to some extent by buying out the
dollars from the forex markets, does not think it is
wise to try and stop the rise of the rupee anymore.
Partly this may be because it already has enough dollar
reserves (over $110 billion) to take care of any
contingencies, and therefore does not want to buy any
more of it. "The RBI's declared policy is not to try and
influence the value of the rupee [whether going up or
down] as much as to prevent harmful volatility," said Y
V Reddy, the RBI governor. If the federal bank stays
true to that aim and if the rupee continues to
strengthen, a rising rupee then could hit the
competitiveness of the manufacturing sector just when it
is coming into its own.
Another worry is India's
interest rates. They are higher in India compared to the
developed economies, and with a persisting strong rupee,
India's interest rates become even more attractive in
relative terms. This would attract even more foreign
money leading to a perverse result of the rupee
strengthening still further as a consequence.
Still, Singh says, "No one can take the shine
off India this time around." And dismissing criticism
that the 10.4 percent growth rate was a jugglery of
figures, he said, "CSO was not an arm of the Finance
Ministry. Its an old organization and has done sterling
services. We can't start deriding an establishment in
the heat and dust of electoral battle."
Moreover, according to David Burton, the
International Monetary Fund's top boss in Asia, "Even if
India isn't as open as China, which probably holds it
back and keeps it from having as big an impact on the
global economy, India is definitely emerging as a force
in its own right."
Li Deshui of China's National
Bureau of Statistics predicts that China's economy will
grow above 7 percent year-on-year in 2004, whereas the
widely circulated view is that India's economy growth of
7 to 8 percent is clearly within the realms of
possibility.
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