Eight Economic Indicators which Tell Us that the Indian Economy is Not Doing Well

There is a very interesting story about current Chinese premier of the State Council Le Keqiang. In 2007, when Keqiang was the head of the Communist Party of the Liaoning province, he was once unusually candid with the American Ambassador to China, about the local economic data.

The American Ambassador sent a confidential memo after the meeting. This was later leaked and published by WikiLeaks. As the newsagency Reuters reported in 2010: “The U.S. cable reported that Li…focused on just three data points to evaluate Liaoning’s economy: electricity consumption, rail cargo volume and bank lending.”

“By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable added. The data points that Keqiang looked at was promptly dubbed the Li Keqiang Index, writes Satyajit Das in The Age of Stagnation.

Over the years, doubts have always been raised regarding the veracity of the Chinese gross domestic product(GDP) numbers. GDP is a method of measuring the size of an economy. But the lack of credibility of Chinese data is not the issue I am trying to raise here. The bigger point is that the GDP is ultimately a theoretical construct and given that there are other ‘real’ data points that we need to take a look at to figure out the ‘realistic’ state of any economy.

In the Indian context the tendency in the recent past has been to look at economic growth (GDP growth), which has been higher than 7%, and say that we are the fastest growing large economy in the world. Another version of this tendency is to say that we are now growing faster than China.

The trouble is if we were to look at ‘real’ data points (or the Indian version of the Li Keqiang index), the economy looks clearly to be in a weak territory. Let’s look at some of the data points.

a) New Car Sales: New car sales are a very good indicator of consumer demand in urban India. In December 2015, new car sales grew by 11% to 2,32,000 units. The leading pink paper splashed this news on the front page, where it said: “Besides being a large direct employer, the automobile sector has crucial interlinkages with a raft of sectors and its performance is a crucial barometer of economic confidence.”

New car sales are a reliable economic indicator which tells us whether the economy is starting to pick up. People buy a car only when they feel certain about their job prospects and hence, feel financially secure. Further, once car sales pick up, sale of steel, tyres, auto-components, glass etc., also starts to pick up as well. New car sales have a multiplier effect and hence, are a good indicator of economic growth. At least that’s how one would look at things theoretically.

While new car sales are an important economic parameter to look at, they are clearly not the only parameter, especially in a country like India where owning a car continues to remain a luxury. There are other data points which the pink paper should have also splashed on its front page, but it did not. But no worries, you can read up about them, in what follows.

b) Two wheeler sales: Two-wheeler sales are a good indicator of consumer demand both in rural as well as urban India, given that they are more affordable than cars are. Two wheeler sales of five leading two wheeler companies (Hero MotoCorp, Honda Motorcycle and Scooters, Bajaj Auto, TVS Motor Company and Royal Enfield) fell by 3.41% in December 2015 to 12,46,356 units.

This tells us very clearly that the consumer demand for a larger section of the population continues to remain subdued. This is a clear reflection of weak rural demand. And it is worth remembering here that half of India’s population stays in rural areas.

c) Liquor demand: Consumption of alcohol is another good data point to look at. This is primarily because people are addicted to it and don’t give up on its consumption so easily. The trouble is that this data is not so easy to get.

A recent newsreport in the Mint newspaper points out that: “For the first time since the start of the millennium, the volume of liquor sales in India declined in 2015…Liquor sales volumes, which grew in the low single digits in the two previous financial years, are down 1-2% for the eight months to December, according to data gathered from executives at liquor companies.”

As Vijay L Bhambwani, CEO of BSPLIndia.com, told me regarding these numbers: “Going through the numbers, two things emerge – resistance to spending by consumers and down-trading by consumers (sales of higher price brands falling & lower priced brands rising). Remember the economic survey by the government in mid-2008? The sales of toothpaste had fallen & tooth powder had risen. Consumers down-traded high priced brands. A big fall in consumption followed soon. Demand for alcohol tends to be inelastic due to addictive nature of intoxicants. These aren’t great signs.”

d) Bank loan growth: This is one of the point that the Chinese premier Le Keqiang liked to look at. The loan growth of scheduled commercial banks has been in single digit territory for a while now. Between November 2014 and November 2015, bank loans grew by 8.6%.

They had grown by 10.5% between November 2013 and November 2014. In fact, given the fact that bad loans of public sector banks have been piling up, lending to industry has grown by just 5% over the last one year. It had grown by 7.3% between November 2013 and November 2014. This slowdown is a clear indication of weak industrial activity in the country.

e) Steel output: This is another data point which tells us how things are looking in the manufacturing sector given that a lot of steel is required to manufacture things. Data released by the Joint Plant Committee shows that steel production in November 2015 fell by 8.5% to 7.1 million tonnes.

f) Declining investment announcements: Data from Centre for Monitoring Indian Economy (CMIE) points out that “investment proposals to set up new capacities declined substantially in the quarter ended December 2015. 381 new projects with investments worth R.1,05,000 lakh crore were announced.” This was 74% lower than in three-month period ended December 2014. Such a huge fall is also because of a large number of projects had been announced in December 2014. “The largest being Indigo’s 250 aircraft purchase from Airbus worth Rs.1.5 billion. Investment in this single project was more than one third of the total aggregated cost of all new projects announced in the quarter,” CMIE points out.

g) Decline in project commissioning: This is a very important lead economic indicator and tells us whether economic revival is on the anvil. The latest data doesn’t indicate anything like that. As CMIE points out: “Project commissioning in December 2015 quarter dropped 44 per cent on Y-o-Y basis. 269 projects with investments worth Rs.496 billion were commissioned. According to CMIE’s CapEx database, quite a few large projects were scheduled to get completed in December 2015 quarter, but latest information on their status is yet to come in. Companies are expected to disclose information on commissioning of their fresh capacities along with their December quarter results. With information on project commissioning coming in with a lag, the aggregates are expected to go up. However, chances are less that the aggregates will reach the year ago levels.”

h) Electricity consumption: This is another economic indicator that the Chinese premier liked to look at. As CMIE points out: “According to tentative data released by the Central Electricity Authority (CEA), India’s power generation grew by 2.7 per cent from 86.9 billion units in December 2014 to 89.3 billion units in December 2015.” Things have improved a little on this front, but it is very difficult to say whether that has been because of the revival in industrial demand.

i) Corporate earnings: The financial results of companies for the period October to December 2015, will soon start to be published, from next week onwards. Crisil Research expects revenue of companies (excluding banks and oil and gas companies) to grow by a measly 2%. This will be driven by “low-base effect (growth in the corresponding quarter of last fiscal was just 5%) amid crushed commodity prices, weak investment demand, flagging rural consumption.”

As Prasad Koparkar, Senior Director, CRISIL Research, put it: “Sectors more focused on urban consumers such as automobiles, media, retail, and telecom are projected to post healthy double-digit topline growth…But in general India Inc is grappling with poor demand sentiment. With lower input costs and intense competition, pricing has also been impacted. This is evident across a range of sectors airlines, FMCG, textiles, cement (except south India), and IT services. In addition, the heavy rains that disrupted normal life in Chennai will impact the December 2015 quarter numbers of consumer discretionary sectors as well as IT services, auto components, and engineering.

What these numbers clearly tell us is that the Indian economy is in a bad shape and there is no way we could possibly be growing at greater than 7%. We might be the only bright spark globally when it comes to economic growth, but we are clearly not growing as fast as is being made out to be.

The column originally appeared in Vivek Kaul’s Diary on January 8, 2016

What the media did not tell you about the economic growth number

In yesterday’s column I had explained why the gross domestic product (GDP) growth number of 7.4% is more of a statistical quirk. The GDP is essentially the measure of the size of an economy.

The coverage of the GDP news in the media talked about the 7.4% economic growth, without really getting into the details of how that number was arrived at. The GDP growth of 7.4% that everyone from the politicians to the media seem to be talking about is essentially the real GDP growth.

Neither the media nor the economists and the politicians talked about the nominal GDP, which came in at 6%. The nominal GDP is calculated at the current price levels. Once this is adjusted for the prevailing inflation, we arrive at the real GDP.

Hence, nominal GDP growth minus inflation equals the real GDP growth. In this case, the nominal GDP growth came in at 6% and was lower than the real GDP growth of 7.4%. This meant that the inflation was negative. The inflation in this case is referred to as GDP deflator and came in at – 1.4%.

This as I had explained yesterday is because the GDP deflator is a sort of a combination of inflation as measured by the consumer price index and inflation as measured by the wholesale price index. The wholesale price index has been in negative territory for some time now. And this has led the GDP deflator into negative territory as well. Hence, the deflator instead of deflating the nominal GDP number is inflating it.

This is a point that the experts and the media missed out on. There was another important point that the media missed out on and was brought to my notice by Anindya Banerjee, Analyst, Kotak Securities, FX and interest rate desk.

Nominal GDP Growth

Earlier this year, the ministry of statistics and programme implementation moved to a new way of measuring the gross domestic product. They also produced some backdated data for the last few years. The red curve shows the nominal GDP growth rate as per the new method of calculating the GDP. The blue curve, on the other hand, shows the GDP growth as per the old method of calculating the GDP.

What the table clearly tells us is that the nominal GDP growth has collapsed. In fact, as the table clearly shows the nominal GDP growth has never been as low as it is now, in the last ten years. I know I am committing a sin here by mixing data from two different GDP series but the trend has been clearly downward. And this is a reason to worry.

As I had mentioned in yesterday’s column, negative wholesale price inflation has had a huge role to play in inflating the economic growth number. India is seeing a negative wholesale price inflation because of several reasons. Commodity prices have crashed and that is the good bit, because we import a huge amount of important commodities like oil.

On the flip side, negative wholesale price inflation is also a reflection of weak industrial and consumer demand, low capacity utilisation by factories as well as low private investment and falling exports.

These factors are a negative for the economy. But they have ended up adding to the calculation of the GDP in a positive way. The negative wholesale price inflation has led to a negative GDP deflator which has in turn inflated the real GDP growth number. And this has meant that even though the real GDP growth number is strong, the economic growth doesn’t really seem strong.

What all this tells us is that for economic growth to really recover, the nominal GDP number needs to start to move up. Also, it is worth highlighting here that nominal growth really matters.

Corporate earnings are not adjusted for inflation through the GDP deflator. Neither are wages given by companies both private and government, as well as entrepreneurs. And this has an impact on the psychology of private consumption. The corporate earnings for the period of three months between July and September 2015 grew by less than 1%. In this scenario wage increments will be low.

Let’s say the companies are generous and give around 3% wage increments to their employees in the coming year. The employee will look at it as a 3% increment in wages, which is not huge. He will not look at it as a 7.5% ‘real’ increase in wages (3% nominal wages minus the wholesale price inflation of around – 4.5%). This tendency to look at money in nominal rather than real terms is referred to as the money illusion. Given this, higher wages will not lead to a higher consumption.

The government revenue and the fiscal deficit are not adjusted for inflation either. Also, the fiscal deficit of the government is expressed as a percentage of nominal GDP and not real GDP. Fiscal deficit is the difference between what a government earns and what it spends. Let’s take a closer look at the fiscal deficit number projected by the government for the current financial year, 2015-2016. The fiscal deficit has been projected at Rs 5,55,649 crore or 3.9% of the GDP.

The GDP has been assumed to be at Rs 14,108,945 crore for 2015-2016. The GDP under consideration is nominal GDP. The nominal GDP number for 2015-2016 was arrived at by assuming a growth of 11.5% over the nominal GDP number for 2014-2015.

The nominal GDP growth number between April and June 2015 had stood at 8.8%. Between July and September 2015 it came in at 6%. Hence, for the six months of this financial year, the nominal GDP growth has been nowhere near the assumed 11.5%.

Let’s assume that the nominal GDP growth improves during the second half of the year, and the final nominal GDP growth number comes in at 9%. What happens to the fiscal deficit? Assuming the absolute fiscal deficit stays the same, the fiscal deficit as a proportion of the GDP will cross 4%, against the targeted 3.9%. In order to ensure that this does not happen, the government will have to cut down on its expenditure. In an economy where private expenditure and investment is slow that is not the best thing that can happen.

Further, the government wants to reduce the fiscal deficit to 3% of the GDP by 2017-2018. For that to happen, the nominal GDP has to start to go up at a higher rate. It also needs to be pointed out here that the Raghuram Rajan, the governor of the Reserve Bank of India, in the latest monetary policy statement said that he expects the government to continue maintaining the fiscal deficit in the years to come, despite the increased expenditure due to the implantation of the recommendations of the Seventh Pay Commission.

The column was originally published on December 3, 2015 on The Daily Reckoning