Fact Check: India’s growth did slump to 5.7%, but not due to ‘technical reasons’ as Amit Shah claims

Data released on August 31 marked the sixth straight quarter of slowing growth for the Indian economy as the gross domestic product growth rate slipped to 5.7% in the first quarter of the current financial year. It was a sharp decline from 7.9% growth seen in the same quarter last year.

Attempting to explain the numbers, Bharatiya Janata Party president Amit Shah on Saturday attributed the slump in GDP growth to “technical reasons”.

He claimed the growth rate under the previous government led by Congress had fallen to 4.7% in 2013-’14, before it rose to 7.1% under the BJP-led government. “GDP growth which was 8% during Atal Bihari Vajpayee’s time, came down to 4.7% in 2013-’14, and leave the last quarter because of technical reasons, but we have been successful in taking it to 7.1%,” he said at an event organised by the Federation of Indian Chambers of Commerce and Industry.

Shah is plain wrong on one count. The 4.7% growth rate cited by him for the last year of the Congress government was only a provisional estimate. It was later revised to 6.4%.

The BJP president did not elaborate on what he meant by “technical reasons” – the Goods and Services Tax was introduced only towards the end of the first quarter of the current financial year, so it is unlikely he was referring to that. Earlier in the speech, he boasted of a change in the government’s approach towards calculating the gross domestic product. “Earlier, it was only limited to agricultural, services and manufacturing,” he said. “Infrastructure was limited to power and roads. We have changed the definition of infrastructure and changed the approach.”

There was indeed a change in the way GDP growth numbers are calculated in India. But not quite in the way Shah described it. What is significant, though, is that the change led to an upward revision in growth numbers under the BJP-led government. The growth rate in 2014-’15 was revised from 7.2%, according to the old method, to 7.5% as per the new methodology. Even the 7.9% growth rate in 2015-’16 was revised to 8%. For 2013-’14, the last year of the Congress government, the number dropped marginally from 6.5% to 6.4% – still significantly higher than what Shah had claimed.

What led to the changed numbers

Earlier, the GDP calculations were based on 2004-’05 as the base year. A base year signifies a benchmark for calculations such as prices of commodities which are accounted in the GDP. The base year, however, was changed to 2011-’12, six months after the BJP-led government took charge with Narendra Modi as the prime minister.

Another change in the series was a move away from factor cost based model to market pricing one. In simpler terms, the calculation of economic activity in the country is now done on the basis of current market prices of commodities as opposed to the cost of goods and services that go into their production. The changed methodology resulted in higher growth numbers, which the government took credit for, when they were released in May 2015.

The revised numbers generated much debate. Raghuram Rajan, who was then RBI governor, suggested that the new methodology might be counting economic activity twice. “We have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas,” he told students at a convocation last year. “It is important that when they move into newer areas, they are doing something which is adding value.”

Others pointed out the problems with the choice of the year 2011-’12 as the base year, since inflation was at its highest then. As a result, future calculations could show inflation estimates lower than actual and that could result in the GDP being projected as higher than it should be.

What is causing the slowdown

The technical changes in the way GDP is calculated did not lead to the slowdown. So what did?

According to economists, there are multiple factors leading to a slowdown in the economy such as the spillover effects from demonetisation, tepid bank credit growth, bad loans problem and a general slowdown in industry made worse due to the uncertainty from the rollout of the goods and services tax.

Radhika Pandey, consultant at National Institute of Public Finance and Policy, said that all high-frequency indicators such as index of industrial production, bank credit growth and industry surveys show dim hopes of a quick recovery.

“Even the RBI’s annual report noted that industry is in a bad shape and it is a consumption driven economy for now,” Pandey said. “The report said that if it weren’t for seventh pay commission and one rank one pension, the growth numbers would have been 2% lesser than what they came in as. So I think we are entering a phase of new normal of 6-6.5% growth till longer term issues of bank credit, bad loans and private investment are sorted out.”