Misplaced optimism

Manufacturing growth: Manufacturing GVA growth went up by 13.9% in Q2 of FY24 but this was due to abysmally low base of -3.8% of the corresponding quarter of FY23. In Q1 of FY24, it grew by 0.9%. In the entire FY23, it grew by 1.3% (negative growth in Q2 and Q3 of FY23, at -3.6% and -1.1%, respectively). These are below par even for the slowest growing agriculture.

The Governor highlights the PMI for manufacturing, which went up to 56 in November 2023. But he overlooks that it consistently fell from 58.7 in May 2023 to 55.5 in October 2023 and the November number (56) is a mere 0.1 percentage point higher than that of October 2023. Here is another point to ponder: The manufacturing PMI was at high 58.9 in October 2020 (FY21) – the fiscal in which the GDP collapsed to -6.6% (later revised to -5.8%). How reliable then the PMI numbers are as growth indicators?

Capacity utilisation (CU), as per “early survey results” for Q2 of FY24 (not yet released), the Governor said, is 74% – up from 73.6% in Q1 of FY24 and above long-term (FY09 to Q1 of FY24) average of 73.7%. Again, what he doesn’t reveal is more important: the rise in Q2 of FY24 is marginal (0.4 percentage points) and CU had fallen from 76.3% in Q1 of FY24, 74.3% in Q4 of FY23 and 74% in Q3 of FY23.

A far better measure is the IIP manufacturing (actual production) – which is missing from the list because it is low and declining. During H1 of FY24 manufacturing IIP grew at 5.7% – far lower the overall GVA growth of 8.7% at current prices and 7.6% at constant prices (average of Q1 and Q2 of FY24). In September 2023, it fell to 4.5% – the same as for FY23 (falling to 4.5% in FY23 from 11.8% in FY22).

The October’s IIP numbers were released after the Governor’s December 8, 2023 list (on December 12, 2023), showing a growth of 10% over abysmally low base of -5.8% in October 2022.

The RBI data on (manufacturing) order book and inventory are missing from the list. The data up to Q1 of FY24 shows, growth in “new order book” fell to -1.3% in Q-on-Q and to 1.5% in Y-on-Y; “inventory/sale fell from 64.1%in Q4 of FY23 to 63% in Q1 of FY24.

Services sector: High-frequency services data (e-way bills, railway freight, toll collections, port traffic etc.) are unsuitable indicators of growth because they rise over time, unless hit by natural or man-made disasters. Also, high toll-tax and diesel tax collections are due to predatory pricing (no tax haven-like DTATs to help vehicle owners who pay advance road tax and no relief for consumers from cheap import of Russian oil). The PMI for services is also missing from the list, which fell to 56.9 in November 2023 – from 61 in September 2023, 62.3 in July 2023 and 62 in April 2023 (FXEMPIRE).

GST collections: The GST (indirect tax) numbers are unsuitable growth indicators for similar reasons: grows with time, higher inflation and tax on food items (exempted earlier). Better indicators are: (i) gross tax-to-GDP which fell from 11.4% in FY22 to 11.1% in FY23 and FY24 (BE) and (ii) tax base (ITRs declaring taxable income) has shrunk by 54% in seven years between FY16 and FY23 (“GDP growth: Headwinds in financial assets, tax filings hurt average Indian”).

FMCG growth: Overall FMCG sales (in volume) have picked up in the first three quarters of FY24 (3.1%, 7.5%, 8.6%, respectively) – but this is (a) due to low-base effect as the corresponding sales (volume) in FY23 were negative (-4.1%, -0.7% and -0.6%, respectively), as per the NielsenIQ which the RBI Governor uses (but ignored). What he also ignores is (b) distributors’ revelation that persistent low demand has led to rise in their stocks (inventory days doubled in some cases), forcing them to push excess stocks to retailers and extend higher credit periods to retailers (45 days) – in pre-Diwali period.

What more RBI Guv ignores

Strange that the RBI Governor first expressed surprise at “elevated” core inflation in his April 2023 (MPC) statement and repeated it in his December (MPC) statement (“continues to be sticky”) – which is despite a fall in input cost and headline inflation (CPI) – without explaining ‘why’ even once. Not just globally, even in the Indian context, former RBI Deputy Governor Viral Acharya explained (using extensive data) that this was due to predatory pricing by Big Businesses (the Big 5 for India are the Reliance, Tata, Birla, Adani, Bharti groups) as their concentration across industry and pricing power grows (“Pricing Power Behind High Inflation?”. Core inflation continues to be sticky in November 2023 (over 4%).

But that is not the only trouble.

The RBI Governor has never addressed a big concern for non-government economists: Overestimated growth in the 2011-12 GDP series by 2.5 to 3 percentage points. Former CEA Arvind Subramanian and economist Ashoka Mody have flagged this many times since 2019, the last being in September 2023 (“What is hurting India's exports engine”). The MCA-21 database (self-populated by industry) which provided the manufacturing and services numbers for the 2011-12 GDP series (released in January 2015) remains deeply flawed even now. The Governor has also kept silence on skyrocketing income inequality – reflected in inverted sales of cars, smart phones, houses etc. (“What gets missed in India’s growth indicators”) – which makes growth unsustainable.

The upward revision in the growth estimate for FY24 is, therefore, based on selective data.

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