India Dethrones China As The Fastest-Growing Economy: Growth Story With A Twist

Ministry of Statistics (India) announces its growth numbers every quarter and understandably it generates quite a buzz all around the world. Recently World Bank announced that India would overtake China’s GDP growth rate in the next 2 years. Surprisingly, however, this forecast seems to have been realized 2 years earlier, going by the new numbers released by the ministry. This means, India has already dethroned China as the world’s fastest growing economy, much ahead of the industry pundits’ expectations. How has this happened? Thanks to the latest statistics and the new methodology released by the Ministry of Statistics that has revised the quarter growth percentage of India.

Economists, academics and investors alike are trying to make sense of this anomaly.

Mr. Eswar Prasad [Former Asia economist, IMF] says, “Those of us who follow India closely are really struggling to make sense of this.”

New Methodology

So how exactly is the new way of calculating GDP different from before? Firstly, the base year at which price levels are derived from has been updated from 2004-2005 to 2011-2012. Secondly, GDP numbers used to be calculated at factor cost (costs incurred to produce a good/service) which will now be calculated at market prices (price paid to the producer by the consumer when he buys a good/service). This would seem a natural transition given that most countries and renowned international agencies calculate GDP using market prices.

Contributing Sectors

The biggest contributing sectors to Indian GDP by “Gross Value Add” as reported by Ministry of Statistics (India) are as follows: Financial, real estate and services (21%), Trade, hotels & communication (19%), Manufacturing (18%), Agriculture, forestry & fishing (16%), Public sector (13%). Chart below explains how these sectors have behaved in FY 2013-2014 & FY 2014-2015 respectively.

As can be seen there has been significantly more activity during the last financial year than in FY 2013-2014 in sectors such as Finance, services, manufacturing, real estate, public sector, construction & utilities.

The China comparison and Geopolitics

While analysts at World bank, IMF, Goldman Sachs predicted that India would outpace china’s GDP growth by 2016, the new methodology of calculating GDP along with China’s slow economic growth has made sure that India has achieved this objective this year itself as shown below.

However, any such direct comparisons do not really make much economic sense as China’s GDP is much larger than that of India. Ashish Kumar [Director General, Central Statistics Office] says,

 “If this kind of growth continues and China continues to perform at a lower level, then still it will take 20 to 30 years to catch up.”

Questions have risen if the swap in methodology was done to showcase better numbers by the new Narendra Modi government. To debate the politics behind numbers is beyond the scope of this article, but the change in itself is consistent with international practices and should be treated with optimism. Having said that, this growth portrait doesn’t seem to reflect the ground realities. Exports in December have slumped 3.8%, Banks are reluctant to lend money to debt ridden corporates, and the bureaucracy is still as opaque and rigid. Much rests on the coming Budget and how it addresses these key issues.