New GDP series

Even RBI does not trust the new GDP number

RBI-Logo_8
Earlier this year, the ministry of statistics and programme implementation revised the way the gross domestic product(GDP) is calculated. Such a revision is necessary every few years, given that the structure of the economy keeps changing. Over and above that, the datasets that are used to compute the GDP also keep improving. Given this, the change is necessary. This revised method led to the economic growth for 2013-2014 being revised to 6.9% against the earlier 5%. In fact, using the new model, the growth projected for 2014-2015 was forecast to be at 7.4%. Earlier, the Reserve Bank of India (RBI) had projected an economic growth of 5.5% for 2014-2015.
The ruling politicians have caught on to the new economic growth number, with finance minister Arun Jaitley even talking about India returning to double digit economic growth soon. As he said in the budget speech in February: “Based on the new series, real GDP growth is expected to accelerate to 7.4%, making India the fastest growing large economy in the world…We have turned around the economy dramatically, restoring macro-economic stability and creating the conditions for sustainable poverty elimination, job creation and durable double-digit economic growth. Domestic and international investors are seeing us with renewed interest and hope.”
Jaitley’s comment notwithstanding, there has been extensive scepticism about the new growth number. Arvind Subramanian, the chief economic adviser to the ministry of finance in an interview to the Business Stanard said: “This is mystifying because these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy. The year 2013-14 was a crisis year – capital flowed out, interest rates were tightened and there was consolidation – and it is difficult to understand how an economy’s growth could be so high and accelerate so much under such circumstances.”
Andy Mukherjee writing for Reuters made a very pertinent point when he said: “No large economy has pulled off…such a handsome pickup in output[GDP],to [an]…analysis of 189 nations over 33 years.” Mukherjee was talking about the jump in economic growth in 2013-2014, from the earlier stated 5% to 6.9% as per the new method.
Now even the RBI has questioned the credibility of the new method of measuring the GDP. In the monetary policy report dated April 2015 and released on April 7, the central bank said: “The new GDP data…came as a major surprise as it produced significantly higher growth at constant prices.”
“The divergence between the new series and the old series in the pace of growth of the manufacturing sector has turned out to be stark; in particular, the robust expansion of manufacturing portrayed in the new series is not validated by subdued corporate sector performance in Q3 and still weak industrial production,” the RBI said.
For the period October to December 2014 (or what is referred to as Q3 by the RBI) both corporate profit and sales remained weak. A newsreport in the Business Standard points out that “aggregate net profit of 2,941 companies” declined by 16.9% in comparison to October to December 2013. The sales growth also has been the weakest in at least 12 quarters, the report points out. This clearly shows that the manufacturing sector continues to remain in a weak zone.
And manufacturing is not the only sector which remains in trouble. As the RBI report points out: “In the financial and real estate sub-sector, the high growth of 13.7 per cent at constant prices is not corroborated by the observed sluggishness in key underlying variables such as credit and deposit growth, housing prices, rent and most importantly, the subdued performance of real estate companies in terms of sales growth and earnings.”
Lending by banks has grown by a minuscule 9.5% in the last one year, data from the RBI points out. In comparison, the growth in deposits collected by banks has been at 11.4%. What also needs to be taken into account here is that the deposit growth has been on a higher base. Both deposit growth as well as loan growth of banks is at a multi-decade low. So, how is the finance as well as real estate sector growing at 13.7%, is a question that RBI is asking?
The RBI report then goes on to say: “Data revisions and their after-effects are not unique to India, but the magnitude of the gap in real GDP growth rates between the old and the new series for 2013-14 and 2014-15 has complicated the setting of monetary policy. Undoubtedly, the new GDP data embody better coverage and improved methodology as per international best practices. Yet these data cloud an accurate assessment of the state of the business cycle and the appropriate monetary policy stance.”
There are multiple things that the central bank is saying here. First, is that it doesn’t really believe in the new GDP number. And that has made the setting of the monetary policy more difficult for the RBI. If India is currently growing at more than 7%, then the RBI should not be cutting the repo rate, but raising it. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.
Nevertheless, all real time data seems to suggest that India is not growing at higher than 7%.
The broader point here is that if the RBI does not believe the new GDP number, why would anyone else do as well? As Ruchir Sharma of Morgan Stanley recently wrote in the Financial Times: “India’s latest growth data look less like the work of a calculating political machine than the result of bungling… This is a classic example of how Indian bureaucrats can take something that is not broken and fix it until it is…It’s hard to see how India’s economy could have been accelerating when the government was restraining its spending, investment was weak and credit was barely growing.” This clearly does not show India in a good light.
The situation needs to be set right if India does not want to go the Chinese way on this front. Analysts have questioned the validity of Chinese data for a very long time. India clearly needs to avoid going that way. 

The column originally appeared on The Daily Reckoning on Apr 9, 2015

The 7.4% GDP growth number is difficult to believe. Here’s why…

iipVivek Kaul

A lot of questions have been raised about the validity of the economic growth number put out by the ministry of statistics and programme implementation earlier this month. The ministry expects the gross domestic product(GDP) growth during this financial year to be at 7.4%. The number was based on a new GDP series. Before this, the Reserve Bank of India(RBI) had forecast a GDP growth of 5.5%.
Until now, no reasonable explanations of this sudden jump in economic growth have been provided. The trouble, as I have mentioned on earlier occasions, is that, the high frequency data that has been coming out doesn’t seem to suggest that the economy has any chance of growing at 7.4%.
In fact, some high frequency data that has come out over the last few days, continues to suggest that it is unlikely that the economic growth during this financial year will be at 7.4%.
Take the case of corporate profit and sales. A recent news report in the Business Standard points out that “aggregate net profit of 2,941 companies” declined by 16.9%. The sales growth also has been the weakest in at least 12 quarters, the report points out. Falling profits and slowing sales clearly show weak consumer demand.
This has also led to the tax collection targets of the government going awry. For the first ten months of the financial year between April 2014 and January 2015, the total amount of indirect tax(service tax, central excise duty, customs duty) collected went up by 7.4%, in comparison to the last financial year.
The budget had assumed a 20.3% jump in indirect tax collections. And that hasn’t happened. In fact only 68.6% of the annual indirect tax target has been collected in the first ten months of the financial year. It seems highly unlikely that the government will be able to meet the indirect tax target that it had set for itself at the time it presented the budget in July 2014.
Things are a little better on the direct taxes front. The growth in direct taxes was expected to be at 15.7% during the course of the year. The actual growth during the first ten months of this financial year has been at 11.4%. Hence, the gap between the expected growth and the actual growth is not as huge as it is in the case of indirect taxes. In fact, Rs 5,78,715 crore or 78.6% of the annual target has been collected during the first ten months of this financial year.
Direct taxes are back ended(i.e. a large part gets paid during the last three months of the financial year). In a report titled Will the Government Meet the Fiscal Deficit Target for F2015? analysts Chetan Ahya and Upasana Chachra of Morgan Stanley point out that “tax collection picks up seasonally toward the end of the fiscal year, with direct tax collection between December and March at 51.4% of total (five-year average).”
Given this, the gap between expected collections and the actual collections will not be huge, by the time this financial year ends. But indirect taxes will continue to be a worry.
There is other high frequency data which clearly suggests that all is not well with the Indian economy. Loans given by banks are one such data point. Latest data released by the Reserve Bank of India(RBI) suggests that bank loans have grown by 10.7% over the last one year (as on January 23, 2015). In comparison, they had grown by 14.4% a year earlier. Interestingly, bank loans have grown by just 6.7% during this financial year.
In fact, things get more interesting if we look at the sectoral deployment of credit data released by the RBI. This data among other things gives a breakdown of the total amount of bank lending that has happened to different sectors of the economy.
The lending to industry has grown by 6.8% during the last one year (as on December 26, 2014). During the same period a year ago, the lending had grown by 14.1%. A slowdown in bank lending is another clear indication that all is not well with Indian businesses as well as the economy.
A major reason for this slowdown in lending is the fact that public sector banks are still facing the problem of bad loans. As Amay Hattangadi and Swanand Kelkar of Morgan Stanley write in their latest Connecting the Dots newsletter titled Putting Serendipity to Work: “State-owned banks that comprise over 75% of the banking system’s outstanding loans are constrained in their ability to lend. Neither has the formation of bad assets ebbed, as is being evidenced in their latest quarterly reports nor have they been able to raise adequate capital to accelerate lending.”
The monthly wholesale price index (WPI) inflation data also points in the same direction. For the month of January 2015, the WPI inflation was at (-)0.39% versus 0.11% in December 2014. Manufactured products which form 64.97% of the index declined by 0.3%. What this tells us is that manufactured products inflation has more or less collapsed. A major reason for the same lies in the fact that people are going slow on buying goods.
Despite falling inflation, people still haven’t come out with their shopping bags.  When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. This also tells us that businesses have lost their pricing power, given that consumers are not shopping as much as the manufacturers can produce.
If all this wasn’t good enough, exports have been growing at a minuscule pace as well. The total exports for the period April 2014 to January 2015 stood at $265.04 billion. Between Apirl 2013 and January 2014 the exports had stood at $258.72 billion. This means a growth of 2.44% in dollar terms, which is nothing great. In fact, during January 2015, exports stood at $23.88 billion down 11.2% in comparison to January 2014.
Car sales, another good indicator of economic activity, also remain subdued. They grew by 3% in January. The  Society of Indian Automobile Manufacturers (SIAM) expects sales growth to be subded during this financial year at 3-5%.
What all this clearly tells us is that 7.4% GDP growth is just a number. It is clearly not happening at the ground level.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Feb 19, 2015

Why 7% economic growth looks difficult despite new GDP data

deflationVivek Kaul

“Pessimism sells. For reasons I have never understood, people like to hear that the world is going to hell, and become huffy and scornful when some idiotic optimist intrudes on their pleasure.” Professor Deirdre McCloskey – Quoted in The Absolute Return Newsletter

Last Friday the ministry of statistics and programme implementation released a new way of measuring the gross domestic product. The ministry changed the base year for measuring GDP from 2004-2005 to 2011-2012.
The structure of an economy keeps changing. Further, the quality of data that the government has access to keeps improving as well. These changes need to be incorporated in the way the GDP is calculated.
As Crisil Research points out in a recent research note: “The revised series is much wider in scope. The coverage has now expanded to include trade carried out by manufacturing companies (this was earlier a part of trade under service sector), and, among others, partnership firms covered under Limited Liability Partnership Act.”
In fact, as per the new GDP data the Indian economy grew by 4.9% during 2012-13, and 6.6% during 2013-14. The earlier calculations had suggested that the Indian economy grew by 4.5% in 2012-2013 and 4.7% in 2013-2014.
The expected GDP numbers for 2014-2015 calculated as per the new method will be released on February 9, 2015. While the difference in GDP growth is not much in 2012-2013, the difference in 2013-2014 is significant. “Private consumption, government consumption and fixed investment growth were all understated in the old series,” points out Crisil Research explaining why the GDP growth in 2013-2014 jumped as per the new method.
This jump in growth has been questioned by Arvind Subramanian, the chief economic adviser to the ministry of finance. In an interview to the Business Stanard he said: “This is mystifying because these numbers, especially the acceleration in 2013-14, are at odds with other features of the macro economy. The year 2013-14 was a crisis year – capital flowed out, interest rates were tightened and there was consolidation – and it is difficult to understand how an economy’s growth could be so high and accelerate so much under such circumstances.”
Raghuram Rajan, the governor of the Reserve Bank of India, also advised caution. As he said in a press conference on February 3, 2015: “We do need to spend more time understanding the GDP numbers and we will be watching February 9 releases with great care and delve in deeply into what we see there. At this point, it is premature to take a strong view based on these GDP numbers. Most of the data that we have seen for 2013-2014, except inflation which was very strong, give us a sense that there was lack in the economy.”
Nevertheless, this jump has led to the belief that the economic growth during the current financial year will be much higher than the 5.5% economic growth that has been previously projected. An editorial in the Business Standard newspaper pointed out: “The new numbers for 2014-15 will be published on February 9, but the expectation certainly now is that the number will be even higher, perhaps in excess of seven per cent.”
Other ground level data suggests that this is too optimistic. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out: “Evidence at the ground level (i.e. sales and earnings data from corporates) and other high frequency macro indicators continue to indicate that the economy is yet to see a capex recovery and meaningful pick-up in activities.”
The quarterly results of companies for the period October to December 2014 have been very poor As Swaminathan Aiyar writes in The Economic Times: “CNBC data show that for 664 companies that till last week had declared their financial results for the third quarter, sales are up just 1.3% and net profits by just 3.4% on a year-on-year basis. On a quarter-on-quarter basis, sales are down 2.8% and net profits by 6.1%.”
Inflation is not factored into corporate results. Nevertheless, if we do that it is safe to say that sales and profits of companies have fallen on a yearly basis as well. This is clear evidence of the fact that the overall economy is not doing well. It also gives an indication of the fact that consumers are not ready to spend freely.
Given that companies are not doing well, it has also led to a slow growth in tax revenues for the government. At the time the government presented its budget in July 2014, it had assumed that the tax revenues would grow by 16.9% in comparison to the last financial year. But the tax collected for the first nine months of the financial year between April and December 2014 grew by just 5.4% in comparison to the same period in the last financial year. In fact, the growth in excise duties has been more or less flat at 0.2%.
Another factor to look at are bank loans. Latest data released by the RBI shows that bank loans have grown by just 6.6% during the course of this financial year. They had grown by 10.1% during the same period in the last financial year. This is a clear indication of the fact that businesses as well as consumers are not in the mood to borrow.
Then there are stalled projects as well. As Arvind Subramanian, the chief economic adviser to the ministry of finance wrote in the Mid Year Economic Analysis released in December 2014: “Stalled projects to the tune of Rs 18 lake crore (about 13 percent of GDP) of which an estimated 60 percent are in infrastructure. In turn, this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one (borrowing is used to cover interest payments).”
Unlike the GDP which is a theoretical construct, these are real numbers and they don’t look very good. Even the Reserve Bank of India remained sedate about the growth scenario. As it said in the latest monetary policy statement released on February 3, 2015: “Advance indicators of industrial activity – indirect tax collections; non-oil non-gold import growth; expansion in order books; and new business reported in purchasing managers surveys – point to a modest improvement in the months ahead.”
Given these reasons I would be surprised if the GDP growth number to be released on February 9, 2015, will turn out to be close to 7% or more. If it does that will certainly be a huge surprise.


The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Feb 5, 2015