Story Of The Week

Methodology Change Sees Indian Economy Growing Faster than China’s!!

Economists around the globe, who have all along predicted that India will be the next big thing in terms of business, money, markets in coming years, found their predictions coming true; perhaps sooner than expected as per the latest GDP figures released by the Central Statistics Office of India. The latest data shows that India’s GDP rose by 7.5% year on year in the fourth quarter of 2014, a shade faster than China’s.

For some, it may seem that the Manmohan Singh’s led central government efforts finally paid off, albeit after his term, for others, it will be purely The Modi Effect but actually it’s a plain simple mathematical effect!

The new healthier figures are primarily due to changes made both in the way authorities calculate gross domestic product (GDP) and the base year. Under the new method, the economy expanded 7.5 percent year-on-year during the last quarter, higher than 7.3 percent growth recorded by China in the latest quarter.

New Delhi also revised up growth for the first half of fiscal 2014/15 to 7.4 percent  and forecast the full-year GDP growth to accelerate to 7.4 percent from a revised 6.9 percent a year earlier.

These figures are way more than what was predicted by the RBI for the given period; it was 5.5 percent. GDP is typically measured by reference to the prices and structure of the economy in a base year. Over time this snapshot becomes less relevant, and the GDP figures less accurate, so the base year is updated every few years. The CSO changed India’s from 2004-05 to 2011-12 and it is the main reason of such a drastic change in calculated figures as compared to what was predicted by The Reserve Bank of India.

But the picture is not as rosy on the ground as it looks in record books and news papers. A real growth rate of 7.5% looks a little too lively given sluggish car sales, feeble demand for credit, and the soggy revenue growth reported by many big listed firms. Tax revenue has not been notably buoyant. But the recent sharp fall in inflation explains some of the discrepancy. Firms’ top-line growth has slowed in part because prices are not rising as quickly. The tax take is also harmed when inflation falls. The CSO reckons GDP will grow by 7.4% in 2014-15 in real terms, half a percentage point faster than in the previous year. However, the increase in nominal GDP (i.e., including inflation) is forecast to fall from 13.6% to 11.5%. In other words, falling inflation makes it look like economic activity is growing more slowly than it is.

But a point to note is mere statistical change is not solely responsible for such high numbers. India’s growth outlook has been bolstered by falling oil prices, cooling inflation and Modi’s steps to make it easier to do business. Lower commodity prices, which have hurt raw-material exporters such as Brazil, Russia and South Africa, are a boon for India, which imports 80% of the oil it consumes and much else. The current-account deficit has shrunk. The rupee is firm. Last month the Reserve Bank of India reduced interest rates from 8% to 7.75%.

Portfolio investors have pumped more than $7 billion so far this year into the country’s financial markets.

With varied opinions pouring in from all the directions, one thing is very clear: Don’t jump the gun with the new numbers in place.

Economists are unanimously of the view to tread the future path with caution. According to Mr. Raghuram Rajan “We do need to spend more time to understanding the GDP numbers”.

Industry chamber Assocham seconded Rajan’s view point and said that ” the revision was confusing as investment is yet to revive, consumer demand is not returning with a significant pace despite a sharp reduction in crude oil prices.”

“There is clearly the need to look at the credibility associated with these numbers,” said Jyotinder Kaur, principal economist at HDFC Bank.

To summarize, there is no denying the fact that with a stable, reform minded government at the center there is a definite improvement in investor sentiment and liquidity has increased in the market but at the same time with dismissal industrial output figures and other factors accounted in, the new GDP figures cannot be fully substantiated. Hence, although the Indian tiger has finally raced ahead the Chinese dragon but only time will tell whether it is real or merely on paper!!

References:

  1. The Economist: On the Dragon’s tail.

http://www.economist.com/news/finance-and-economics/21643204-new-figures-show-indias-gdp-grew-faster-chinas-end-2014.

  1. Business Insider: India changed the way GDP is measured and it’s confusing everybody.

http://www.businessinsider.in/India-changed-the-way-GDP-is-measured-and-its-confusing-everybody/articleshow/46194350.cms

  1. The Indian Express: GDP growth at 7.4%, but questions remain over calculation

http://indianexpress.com/article/business/economy/gdp-growth-at-7-4-pc-but-questions-over-calculation/

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