Understated GDP

The economic growth is not losing steam despite increasing external and fiscal vulnerabilities. The economy is thriving on debt based growth for last year (FY17) and outgoing year (FY18) whist the inflation is in single digits. There can be questions on the sustainability of both debt and growth; but the numbers for FY18 are surely not overstated, if not understated.

The measurement of GDP in various sectors is patchy and it depends on data provided by various organizations or collection based on surveys. Hence, the official number is always taken with a pinch of salt. Most discussions and literature had spelled reasons of overstating growth; but due to lack of capacity of actual measurement, the case of understatement is a possibility too.

The official GDP growth provisionally stood at 5.79 percent for FY18 against the target of 6 percent. The WB group endorsed the number in its recent country report where the concerns are shown on external and fiscal challenges. The economic growth of 5.8 percent in FY18 is at the back of 5.3 percent growth in FY17 - back to back 5 percent growth is promising and WB expects growth to remain over 5 percent in FY19 and FY20.

The prospects of growth and inflation are good; but they are hinged upon how the upcoming government tackles external imbalances. The question is what are the growth drivers? Is the growth inclusive? Is the GDP understated?

The growth revolves around 2Cs - consumerism and construction. Both are for catering upbeat domestic demand pushed by government and CPEC activities in building infrastructure. And both these elements are putting pressure on imports to worsen external balance and infrastructure is pushing over spending in budget to widen fiscal balances. It is not sustainable; unless there is an export surplus, soon.

The consumerism growth can be traced to wholesale and retail trade (7.5%) and through manufacturing (primarily LSM - 6.1%). However, seeing the robust performance of listed FMCGs, one gets the impression that GDP is understated. According to Topline Research, the profitability of listed consumer companies, excluding outliers, increased by 24 percent in CY17. Now with inflation in single digit, this results in high double digits real growth.

In case of cement and auto, the numbers are not much different. The cement dispatches increased by a whopping 15 percent in 9MFY18 where in FY17 the growth was mere 4 percent. The growth in cement dispatches in FY18 is the highest since FY08. The automobiles are growing at a higher pace. The four wheelers’ unit (cars, jeeps, LCVs and tractors) sales increased by 24 percent in 9MFY18 to cross 250 k marks. The LSM numbers (6.1%) and construction segment (9.1%) are not fully reflecting the quantum of growth in a few well documented sectors.

The LSM computed by the PBS is not encompassing all the sectors. For instance, value added textile, plastic products, packaged food etc shares in LSM are much less than their actual contribution (See: GDP at risk of being understated, April 11, 2018). And hence, the growth in domestic textile retail segment, packaged food and other products are not being fully reflected in GDP.

The GDP rebasing exercise is underway and it may incorporate or enhance the share of few fast growing sectors. Apart from changing composition in LSM, private education and health have become big in the last decade but their representation in GDP is too low (See Brief Recordings, April 16, 2018). In a nutshell, the capital goods sector including cement, steel, auto etc are growing at much higher pace than recorded GDP growth. And same might be the case of services sector where growth in consumer driven companies is not fully reflecting in wholesale and retail segment.

Apart from measuring major crops, most of the GDP measurements are based on either outdated surveys or information provided by businesses which have incentive to understate the income for taxation reason.
The bottom line is that actual GDP growth may well be not just 13 years high but much more than that. Long live consumer!