If NSO Numbers Show Drop in Manufacturing, Why're Growth Projections Still High?

The numbers published by the National Statistics Office show a decline in factory output and manufacturing output.

In her fiery (and viral) speech in parliament on Tuesday, MP Mahua Moitra of the All India Trinamool Congress cited the latest data from the National Statistics Office (NSO) to slam the government's performance this year.

A speech that may as well be titled Who's the Pappu Now, Moitra said, "This government and the ruling party coined the term Pappu (most often used to belittle Congress leader Rahul Gandhi). You use it to denigrate and signify extreme incompetence. But the statistics tell us who the actual Pappu is."

The statistics that she shelled out, all from the NSO, a government institution, were the following:

• Factory output plummeted to 4 percent in October (a 26-month low)

• Manufacturing output contracted 5.6 percent in October (it was 3.3 percent last year)

"17 of the industry sectors that make up the Index of Industrial Production (IIP) have recorded negative growth rates. Forex reserves have fallen by $72 billion in under a year," she added.

It is pertinent to note that the manufacturing output accounts for almost 78 percent of the IIP's total value.

The numbers that Moitra has thrown at the government seem to paint a bleak picture of the Indian economy. But here's the strange part: predictions surrounding India's growth made by international institutions tell a different story.

What Are Non-government Institutions Saying?

International Monetary Fund: In its annual World Economic Outlook report published in October, the IMF projected India's growth to be the fastest among major economies at 6.1 percent, which would be ahead of China (4.4 percent), Saudi Arabia (3.7 percent), and Nigeria (3 percent).

World Bank: It raised its GDP growth forecast for India during FY23 (Financial Year 2023) to 6.9 percent from 6.5 percent (October prediction). "India's economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies," said Auguste Tano Kouame, the institutions' country director.

Organization for Economic Co-operation and Development: Even the OECD, in its Economic Outlook Note published in November, stated that "India is set to be the second-fastest growing economy in the G20 in FY 2022-23, despite decelerating global demand and the tightening of monetary policy to manage inflationary pressures."

But First, GVA or PMI?

These are two terms one needs to be familiar with while studying the manufacturing sector: GVA (gross value added) and PMI (Purchasing Managers' Index).

Now, according to NSO data, the manufacturing gross value added contracted by 5.6 percent, but the PMI for the same sector came in at 55.7 for the month of November. Given that this was above 50, it indicated that manufacturing activity had expanded from October. India's manufacturing PMI has been over 50 since July 2021, indicating that the sector has continued to grow ever since. So why does the GVA value indicate the opposite?

Speaking to The Quint, Deepanshu Mohan, Associate Professor at OP Jindal Global University and Visiting Professor of Economics at Carleton University, Canada, explained that manufacturing PMI is survey-based data, while manufacturing GVA is calculated with respect to actual activity data. Given the difference in methodology, there will be differences.

"Manufacturing PMI is an index that is made up of five parts: new orders, output, employment, delivery times, and purchase stocks. While PMI shows a short-term scenario, it is the GVA method that should be used to understand the performance of the manufacturing sector. For instance, a bulk of new orders could shoot the manufacturing PMI up for a particular month, without necessarily meaning that the value of the sector has increased."

Importance of Services and Informal Sector

Talking about the above-mentioned projections, Mohan pointed out that there is a difference in methodology in how the NSO published monthly data and how international institutions publish quarterly projections which may not reveal the real state of an economy. "Quarterly estimates of GDP are rudimentary, preliminary-stage estimates computed from limited information."

More importantly, however, Mohan explained that while the manufacturing sector has contracted, it is actually the contributions of India's service sector that dominates the GDP, and has attracted significant foreign investment. "The manufacturing sector has been important for India, but it hasn't driven growth like it has in the case of Bangladesh. India has been facing a crisis of low productivity in manufacturing. Its manufacturing to GDP levels have remained almost the same since the 1960s. But if the service sector starts to decline, that is when India's growth projections will see a fall as well."

The other factor is that India has a strong and resilient informal sector. "The growth projections by international institutions like the IMF, the WB, and the OECD are relative ones. The success of the informal sector is a story that, among the major economies of the world, is unique to India, and to some extent, Brazil and South Africa."

So when an event shocks the global economy and major economies see ominous growth numbers, "it is our strong and resilient informal sector that often comes to the Indian economy's rescue," he added.

What About Long-Term Growth?

Economist Prosenjit Dutta, a commentator on the Indian economy, told The Quint that there are two reasons why there is still some optimism about India's long-term macroeconomic future. The first is that India has a huge consumption market.

"Domestic consumption has traditionally been one of the main drivers of India's economic growth. When consumers spend more, it leads to increased business investment along with a spike in demand for goods and services across industries." This phenomenon naturally leads to high growth.

The other reasons to remain optimistic about India's economic future is the young labour force. "While the working population for many countries is reducing, India is seeing an increase in the young workforce."

India, according to the World Bank, will account for one-fifth of the global increment in the working-age population between 2020 and 2040. This is a period when India’s population between the age of 15 and 59 is likely to increase by around 135 million, while China could see a decline of the same magnitude.

"That huge potential workforce is something India must use to its advantage, but poor policy can lead to disaster. Our unemployment rate has consistently been over 6 percent since 2019," Dutta concluded.