IMF Corrects Its GDP Math

The Washington-based International Monetary Fund (IMF) doesn’t often get its numbers wrong. Its global economic forecasts may occasionally err. But with the elevation of Gita Gopinath from chief economist to deputy managing director, the IMF is busy correcting past mistakes.

In April 2022, IMF data showed that India’s GDP would achieve the $5 trillion milestone only in 2028-29. That flew in the face of projections by most independent analysts that India’s economy was poised to cross $5 trillion in 2026-27 – two years ahead of the IMF’s forecast.  The Covid-19 pandemic had already caused a two-year delay in the government’s target of India becoming a $5 trillion economy in 2024-25. The IMF’s data therefore raised eyebrows.

A contrite correction soon followed. Luis E. Breur, the IMF’s senior resident representative for India, Nepal and Bhutan, told Business Standard on 19 May 2022: “IMF staff discovered a data input error that led to an error in calculating India’s gross domestic product (GDP) denominated in US dollars, which was corrected. More broadly, the Indian economy is recovering well from the pandemic with real GDP estimated to have recovered to above its pre-pandemic level by end-March 2022. The recovery is expected to continue although it is facing downside risks, including from external factors.”

Getting data wrong is an occupational hazard for economists and think tanks. But for the IMF to get its data so wrong is unusual. Breur conceded that even the corrected IMF data which showed Indian GDP at $5 trillion in 2026-27 assumed a constantly depreciating rupee-dollar exchange rate. This highlights how a strong dollar impacts GDP numbers of especially developing countries.

To get a more realistic idea of India’s economic output, consider nominal Indian GDP in rupees. This is projected at around Rs 240 lakh crore as on March 31, 2022 at current prices.  At Rs 77 to a dollar, this translates into a $3.1 trillion economy. At an exchange rate of Rs 75 to a dollar, which prevailed before the Russia-Ukraine war, India’s GDP would today be $3.2 trillion.

Beyond these shifting numbers lie larger qualitative questions. How attractive, for example, is India as a market for global firms? The exit from India of two major multinationals – Swiss infrastructure major Holcim, which owns ACC and Ambuja Cements, and the German cash-and-carry retail chain Metro – has raised several doubts. Is the Indian market losing its lustre? Has the war in Europe and trade-disruptive Western sanctions on Russia made foreign firms risk-averse? Is globalisation in retreat?

There’s mounting evidence that global firms are turning inwards. Earlier this year Citibank withdrew from a dozen international markets, including India, to sharpen its focus on key geographies and lower costs.  Both Holcim and Metro have announced exits from several global markets apart from India. But that’s only half the story.

While European and American companies are reducing their presence in China following an economic slowdown caused by zero-Covid lockdowns as well as due to anger at Beijing’s support for Russia’s invasion of Ukraine, India remains in a sweet spot. Total foreign direct investment (FDI) in 2021-22 was $83.6 billion, two per cent higher than in 2020-21, despite the lethal Delta-led Covid wave in mid-2021.

For every global firm that exits India, however, dozens announce plans to increase their presence in India. Goldman Sachs, Brookfield and IBM have recently doubled down on their India business.  Information technology services major Cognizant gets 75 per cent of its revenue from overseas. But 75 per cent of its employees are based in India. This reflects growing trust in the country’s tech talent.

Western economies are meanwhile facing headwinds due to disruptions caused by the Russia-Ukraine conflict. Inflation is at 40-year highs in the US and Western Europe. The Russian blockade of Ukraine’s Black Sea ports in retaliation for Western sanctions has caused worldwide food shortages.

India though is self-sufficient in food. Inflation is likely to moderate after the Reserve Bank of India (RBI) tightens monetary policy in June.  The ballooning current account deficit (CAD), however, remains a worry. High oil prices have widened India’s merchandise deficit to $20 billion a month. India’s oil import bill has climbed to over $12 billion a month – a full 60 per cent of the monthly trade deficit.

A major failure of the government’s energy policy is the decline in India’s domestic crude oil production. In 2021-22, the production of crude oil from domestic wells fell to 28.4 million tonnes. Shockingly that’s even lower than the production of crude oil in 1994-95 (32.2 million tonnes).  In 1994-95, India imported just over 27 million tonnes of crude oil. In 2021-22, India imported 212 million tonnes. The ONGC produces nearly two-thirds of domestic crude oil. Ironically, it made a windfall profit in 2021-22 of over Rs 40,000 crore due to high international oil prices for domestic crude oil.

The saving grace is service exports with a monthly surplus of over $10 billion, halving the merchandise trade deficit. Foreign remittances and FDI inflows have kept the balance of payments (BoP) positive or in a worst case scenario only marginally negative.

In a turbulent world roiled by war, inflation and recessionary fears in the West, China is the elephant in the room. As the world’s supply chain engine, China’s troubles have a cascading effect.

According to The Wall Street Journal, “China’s current slowdown is evident in the earnings of multinational companies that do big business in China such as Apple Inc. or Tesla Inc., or in the export data published by trading partners such as Taiwan and South Korea. Economists can also pore over business surveys, satellite images and a host of quirkier indicators such as trucking volumes and cement production. Such indicators are becoming more valuable as China itself is more wary of data it shares with the outside world. A data-security law introduced last year has made it harder for foreign companies and investors to get information from within China. It subjects almost all data-related activities to government oversight, including their collection, storage, use and transmission.” 

Data is widely regarded as the new oil. As China is finding out, and as the IMF discovered last month, there is no substitute for good data.