Revisions in India s GDP With MOSPI revising India s GDP estimate to 7.4% for FY15 followed by 6.9% in FY14 and 5.1% in FY13, policymakers are confronted with another conundrum with regards to growth prospects of Indian economy. These numbers have changed the vision with which India s growth has been viewed for last three years, and may even change the shape of growth trajectory in preceding years. Interpreting the trend in growth is befuddling, since the dominant narrative and supportive evidence always pointed at weak growth pulses in the economy. Prima facie, while the huge revisions point towards the fact that growth concerns were perhaps overdone, the data is far from providing comfort. Our sense is, the detailed methodology explaining primer scheduled to be released by the CSO in February end will provide insights into reading the recent set of data better. Industry-wise GDP: Revision of GDP base from 2004-05 prices to 2011-12 was accompanied with several changes in methodology of computation as well as widening of database. Advance estimates for FY15 place GDP growth at 7.4%, where industry-wide Gross Value Added (GVA) grew at 7.5%. The breakup of growth stands as under: Bansi Madhavani bansi@stcipd.com +91-22-66202243 Priyanka Sachdeva priyanka@stcipd.com +91-22-66202229 Table 1: Growth in Real GDP (%) FY13 FY14 FY15 GDP Growth (A+B-C) 5.1 6.9 7.4 A. GVA at basic prices (Sum of 1 to 8) 4.9 6.6 7.5 1. Agriculture, forestry & fishing 1.2 3.7 1.1 2. Mining and quarrying -0.2 5.4 2.3 3. Manufacturing 6.2 5.3 6.8 4. Electricity, gas, water & other utility services 4.0 4.8 9.6 5. Construction -4.3 2.5 4.5 6. Trade, hotels, transport, communication & broadcasting 9.6 11.1 8.4 7. Financial, real estate and professional services 8.8 7.9 13.7 8. Public administration, defence & other services 4.7 7.9 9.0 B. Product Taxes 10.3 6.0 4.8 C. Product Subsidies 18.6-3.8 0.6 Source: MOSPI, PD Research, CEIC Emerging Trends: The largest contribution to FY14 growth (since disaggregated data is not available for FY15) is from the Trade, hotels, transport, communication and broadcasting sector- explaining nearly 30% of the jump in GVA. Another significant boost to overall growth number comes from the stupendous performance of Financial, real estate and professional service segment which recorded steep jump in growth along with noting highest contribution to GDP. Disaggregated data from previous years suggest Financial sector forms ~30% of the segment. Bulk of the growth, therefore, can be attributed to Real estate and professional services. To be sure, the report indicated private corporate sector registered growth of 32% for real estate and professional services in the Apr- Dec FY15 period. 1
On account of some industries getting reclassified from Trade, hotels, transport, communication and broadcasting to Manufacturing and addition of performance of corporate sector while compiling the estimates, Manufacturing industry registered surge in growth. However, this performance does not corroborate with any high frequency indicator of sector s performance. Exhaustive data and detailed methodology may perhaps explain the growth puzzle, going forward. Growth in Public administration, defence and other services appears counter intuitive since the overriding narrative has been that of fiscal consolidation and reduced government spending. In what partially explains this, growth of Public administration and defence has stayed muted at 4.9% for FY14 while it is the Other services which recorded growth of 10.7% for the same period. More information about composition and contribution of Other services would enable better understanding of growth trend. Expenditure-wise GDP: The following table gives the component wise quarterly estimates using demand side approach for FY14 and FY15: Table 2: Growth Rate in GDP (Expenditure-wise) (%) FY14 FY15 Q1 Q2 Q3 Q1 Q2 Q3 1. PFCE 7.7 5.6 4.6 4.3 8.7 3.5 2. GFCE 27.3 5.3 11.1-2.0 5.8 31.5 3. GFCF 2.3 6.3 5.3 7.7 2.8 1.6 4. CIS -20.0-22.5-20.9 3.4 2.7 1.4 5. Valuables -49.4-48.3-55.8 48.3 27.7 15.6 6. Exports 2.6-1.6 15.7 9.3-3.8-2.8 7. Imports -3.5-8.4-14.2-3.6 1.2 1.1 8. Discrepancies -82.3-25.0-110.9-1096.9-82.9-640.3 GDP (1+2+3+4+5+6-7+8) 7.0 7.5 6.4 6.5 8.2 7.5 Source: MOSPI, PD Research, CEIC Emerging Trends: GDP for Q3 FY15 came in at 7.5% higher than 6.4% for the same period year ago. Such high growth rate was driven by government expenditure which jumped by 31.5% for Q3 FY15. With this, it forms nearly 10.6% of the GDP consistent with the trend that has also been witnessed in the earlier series rebased to FY05. Private consumption expenditure, which forms the majority of the GDP number, with 57% contribution grew by 3.5% for Q3 FY15 following 4.3% in Q1 FY15 and 8.2% in Q2 FY15. However this data do not corroborate with the IIP data where consumer goods have been hovering in negative zone barring few readings. Thus, the two numbers can no longer be juxtaposed to draw any meaningful inferences. This could be the result of the fact that expenditure on non durable goods and services saw some improvement during FY15 while durable goods continued to lag behind. 2
A component where the numbers clearly represents the underlying dynamics is the net export component. Exports witnessed de-growth of 2.8% for Q3 FY15 following deceleration of 3.8% in Q2 FY15 and impressive growth rate of 9.3% in Q1 FY15. After noting double digit growth rate for Q3 FY14 and Q1 FY15 on account of likely impact of rupee depreciation which waned gradually as the currency stabilized. On the other hand, muted imports reflect the domestic slowdown which is negated by other numbers. The trends in gross capital formation are also more or less in line with what was noted in the old series. Investment activity picked up in the first quarter of FY15 before dropping to low of 1.6% in Q3 FY15. The annual trends in GDP as measured by demand side dynamics are detailed below: Table 3: Trends in GDP (Expenditure-wise) Growth Rate (%) Rates to GDP (%) FY13 FY14 FY15 FY13 FY14 FY15 1. PFCE 5.5 6.2 7.1 57.9 57.5 57.3 2. GFCE 1.7 8.2 10 10.8 10.9 11.2 3. GFCF -0.3 3 4.1 31.9 30.7 29.8 4. CIS -6.2-21.4 3.9 2.2 1.6 1.5 5. Valuables 3.3-48.7 28.2 2.8 1.4 1.6 6. Exports 6.7 7.3 0.9 24.6 24.7 23.2 7. Imports 6-8.4-0.5-31 -26.6-24.6 8. Discrepancies 0.4 0-0.1 0.4 0-0.1 GDP (1+2+3+4+5+6-7+8) 5.1 6.9 7.4 100 100 100 Source: MOSPI, PD Research, CEIC The trend analysis of the annual figures clearly indicates turnaround in FY15 compared to FY13 and FY14. However, the numbers are only indicative of the sharp improvement which needs to be read in conjunction with the high frequency data. Consumption expenditure both private and government according to the new series witnessed growth rate of 7.1% (6.2% in FY14) and 10% (8.2% in FY14) respectively for FY15 which is contradictory to proxy indicators for these numbers i.e. consumer goods growth rate for PFCE and fiscal numbers for Government spending. Barring these components, both capital formation and net exports are largely in line with anecdotal evidence. Concluding Remarks: With Indian economy shifting to new methodology and base year for computation of GDP, new figures have undergone sharp upward revisions. This comes in contrast to the high frequency economic indicators, which indicated persistent slack in economy. Against this backdrop, such high numbers have opened up space for more policy debates on potential GDP growth and consequent policy action towards narrowing the output gap. We have constantly argued for the need of increased policy efforts towards boosting consumption and investment demand which are prerequisites for sustainable growth. With these new GDP numbers, demand side dynamics present a better picture than ascertained previously. Our sense is that this could be a mere level effect rather than the growth effect- in the sense that level has been raised on account of comprehensive coverage and growth effect from now on needs to be revisited in that context. Therefore, it would be premature to argue that Indian economy is out of woods on the basis of these numbers until analyzed in context of the new potential level and changes in ground realities. 3
On the macroeconomic outlook front, the release of new GDP growth rates changes the backdrop of policy discussions and debate. However, absent extensive time series on new data set, RBI may well adjudge it best to proceed cautiously in interpreting these growth figures. Assessment of potential growth, slack in capacity utilization, growth trend will warrant extreme scrutiny. Coupled with it is the revisions envisaged in CPI inflation series. While we do not expect any dramatic changes in overall inflation trajectory, better assessment of growth-inflation dynamics may warrant a longish pause stance on interest rates by RBI. Our previous base case was a cumulative 75 bps easing of interest rates in FY16, consistent with intent of keeping real interest rates at 1.5%-2%. At this juncture, we reckon incoming data in next month will enable us to better shape our economic assessment and revisit our outlook on interest rates. On the monetary easing side, we believe RBI may oblige the industry with a 25 bps cut in Apr- 15 policy contingent on inflation staying broadly in line with forecasts and healthy fiscal consolidation in Union Budget FY16. Post that, RBI is likely to be increasingly data dependent to evaluate economic outlook and decide trajectory of interest rates. 4
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