As a result of an impressive growth of 13.5% recorded by the manufacturing sector, the Indian economy recorded a growth rate of 8.2% during the quarter ended 30th June, 2018 This rate of GDP growth was way above the street/market consensus of about 7.6% for this quarter. This growth rate is a bit of a surprise because it is at variance with other related macro economic parameters. A 13.5% growth in the manufacturing sector should mean that industrial production is humming loudly, unemployment should have dropped sharply, bank credit should be at a peak and a slump in any correlated sector should be an exception. But that is not so. Many industries, including textiles, consumer goods/durables, engineering goods, transport, real estate etc. are still in the dumps and have yet to record a sharp growth rate, which does not match the growth rate of 13.5% in the manufacturing sector.
A doubt thus arises about the veracity of this growth rate of 13.5% claimed to have been recorded in the manufacturing sector. Ravindra Dholakia, former director of IIM Ahmedabad and a member of the RBI, Monetary Policy Committee, which sets the interest rates in India, says that India probably overestimated its manufacturing output while calculating economic growth that crossed 8% during the June 2018 quarter. He says that the new GDP series has replaced the Annual Survey of Industries, with corporate financial data, for estimating the manufacturing sector value add, which has resulted in a higher share in GDP and a much faster growth rate compared to the calculation under the older method. He says that the higher manufacturing growth rate gives rise to serious doubts about the veracity of the new estimates and is at variance with other macro economic correlates. He doubts whether this new series data represents a fuller description of the manufacturing value-add and thinks that it could be an overestimation.
Prof. Dholakia’s comments reflect a confirmation in the direct taxes collections during the period April-July 2018. The CAG figures reveal that during this period, as against a target of 14.4%, the direct tax collections recorded a growth rate of 6.6% only, of which corporate tax grew by a mere 0.57%, the lowest growth in tax collections, recorded in the past seven years. And this is despite the fact that there has been a huge surge in income tax returns filed, recording an increase of over 60% during the period ended 31st August, 2018. The government mavens say that the subdued tax collection figures could be due to the large amounts of taxes refunded during this period, but that does not yet explain the huge mismatch between the claim of 13.5% growth in the manufacturing sector and the expected buoyancy in tax collection. In addition to a flat growth in tax collections, the rise in bank credit to the manufacturing sector too remains tepid, adding to the feeling that Prof. Dholakia’s contentions could be correct. If we keep the statistics aside and do a ground level survey, there is little euphoria or confidence in the manufacturing sector, which also raises a question on the government claim that the manufacturing sector recorded a growth rate of 13.5% in the June 2018 quarter.