Leading economic indicators have slowed or reversed. Criticisms of official statistics are mounting. But the IMF and World Bank continue to forecast 6-percent growth by simple extrapolation.
As of late last year, official data suggested India was the fastest growing major economy in the world. But serious doubts have begun to emerge about the true state of the economy. The head of the government’s own think tank has expressed alarm at a liquidity crisis that he called “unprecedented in the last 70 years,” and analysts are debating the causes and depth of an ongoing economic slowdown.
Nobody was surprised earlier this month when the World Bank lowered its 2019 growth projection for India to 6 percent from 7.5 percent just four months earlier, and the IMF followed suit, dropping its 7 percent forecast from July down to 6.1 percent.
The dramatic slump in non-GDP indicators
We looked at the growth of leading economic indicators from official Indian government sources for April to September 2019, which corresponds to the first six months covered by the IMF’s new forecast.
Several key indicators are not just slowing, but in absolute decline, including non-oil imports (-6.6 percent in current dollars), non-oil exports (-1.6 percent in current dollars), and the index of production of capital and infrastructure goods (-3.5 percent up to August 2019).
Other indicators show positive growth, but far below the 6 percent benchmark that the World Bank and IMF project for the economy as a whole: the aggregate index of industrial production is up just 2.5 percent, the index of manufacturing output up just 2.1 percent, and receipts from the goods and services tax are up just 1.6 percent in real terms. Growth in toothpaste sales is slowing, car sales have declined for 11 consecutive months, and reports suggested declines in underwear sales.
India: IMF growth forecast versus early 2019 indicators
The IMF’s 2019 growth forecast for India looks optimistic given other key indicators for the first half of the fiscal year
Note: Growth of non-oil imports and exports are expressed in current US dollars, downloaded from the government of India, Directorate General of Commercial Intelligence and Statistics. GDP is measured in real Indian rupees, deflated with the official CPI. The 2018 growth rate is taken from the World Bank WDI. The index of industrial production is taken from Ministry of Statistics and Programme Implementation and ends in August rather than September 2019. Click here for data and Stata code (with hyperlinks to original sources) for more details. (80mb zip file)
The failure of GDP to track imports has been cited as evidence of manipulation of official growth rates, particularly in the case of China. A recent paper by John Fernald, Eric Hsu, and Mark Spiegel of the San Francisco Fed shows that the correlation between GDP and imports is higher in countries with better statistical systems (0.9 for the U.S.), and that imports—which can be verified using the export data of third parties—are a better predictor of other leading economic indicators than is GDP in China’s case.
In India’s case it is not just imports, but also exports, industrial production, tax revenues, and the banking system all pointing in the same downward direction.
New data, new doubts
The latest indicators from April to September 2019 reinforce doubts about India’s official GDP that made a big splash in Delhi earlier this year.
In June, Arvind Subramanian, former Chief Economic Advisor to the government of India and our former colleague here at the Center for Global Development, published a Harvard working paper (and a follow-up paper) suggesting that technical changes in national accounts methodology in 2011 had led India to significantly exaggerate its official GDP growth rate ever since. Rather than 7 percent growth from 2011-12 through 2016-17, Subramanian suggested the true rate might have been closer to 4.5 percent. That discrepancy is, as they say, big, if true.
Official government of India sources dismissed Subramanian’s analysis out of hand, and some independent analysts have questioned whether the recent divergence of GDP growth from growth in other indicators was a sufficient basis to abandon the official figures. But other analysts have looked at the data and reached broadly similar conclusions as Subramanian. Whichever numbers you believe, the core mystery posed by Subramanian remains: How is India growing so fast if, as the government’s own statistics show, a long list of other major economic indicators have slowed or even reversed?
Any errors in India’s data are baked into IMF and World Bank forecasts
Suppose, just for the sake of argument, that Subramanian’s concerns are justified, and that actual growth has been considerably slower than reported growth. Wouldn’t independent analysis by the World Bank and IMF serve to ’fact check’ the government of India’s numbers?
It seems not.
The problem is that, rather than examining independent indicators of economic activity, the Bretton Woods’ forecasts appear to be based primarily on (a) extrapolation of the official growth figures, and (b) some subjective adjustment based on staff’s assessment of policy changes.
The details of the IMF’s growth forecast methodology are not publicly documented, but in response to a query, the IMF noted that the India forecast takes into account data from the first quarter of 2019—i.e., an official growth rate of 5 percent—combined with the IMF staff’s assessment of recent policy moves, including more accommodating monetary policy from the Reserve Bank of India and a cut in the corporate income tax rate.
While reasonable on its face, this approach is extremely vulnerable when confronted with erroneous official numbers. If the growth series up to 2019 is mismeasured, then all those errors are going to be directly baked into the IMF forecast as well.
With trade volumes shrinking and indicators of real economic activity slowing to a crawl, it might be time for the IMF and World Bank to ask some harder questions. India no longer relies on the Bretton Woods institutions for any meaningful share of its financing needs, but if these DC institutions have one thing to offer Delhi, it should be an impartial, technically sound perspective on economic reality.
That reality suggests that Indian growth is in barely positive territory, while the IMF-World Bank forecasters appear too timid to tell the emperor he has no clothes—not to mention cars, toothpaste, or underwear.