two wheeler sales

Indian Economic Growth Data Has Gone the Chinese Way—It’s Not Believable

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The Central Statistics Office (CSO) has declared the economic growth, as measured by the growth in gross domestic product (GDP), for the period October to December 2015. During the period India grew by 7.3%.

The economic growth for the period July to September 2015 has also been revised to 7.7%, against the earlier 7.4%. The economic growth for the period April to June 2015 was also revised to 7.6%, against the earlier 7%.

The CSO also said that the “growth in GDP during 2015-16 is estimated at 7.6 per cent as compared to the growth rate of 7.2 per cent in 2014-15”.

The question to ask here is that why doesn’t it feel like India is growing at greater than 7%? Before I answer this question let me reproduce a paragraph from author and economic commentator Satyajit Das’ new book The Age of Stagnation: “In a 2007 conversation disclosed by WikiLeaks, Chinese premier Li Keqiang told the US ambassador that GDP statistics were ‘for reference only’. Li preferred to focus on electricity consumption, the volume of rail cargo, and the amount of loans disbursed.”

This was promptly dubbed as the Li Keqiang index, by the China watchers.

Over the years, lot of doubts have been raised about the official Chinese economic growth data. And many analysts now like to look at high speed economic indicators to figure out the ‘actual’ state of the Chinese economy.

The Indian GDP data also seems to have reached a stage where it is ‘for reference only’. And we probably now need our own version of the Li Keqiang index, to figure out how different the actual economic growth is from the official number.

It is worth understanding here that GDP ultimately is a theoretical construct. One look at the high speed economic indicators clearly tells us that India cannot be growing at greater than 7%.

Let’s first take a look at the data points that constitute the Li Keqiang index. The electricity requirement for the period April to December 2015 has gone up by only 2.5% to 8,37,958 million Kwh, in comparison to the period between April to December 2014.

How does the earlier electricity requirement data look? The electricity requirement between April to December 2014 had gone up by 8.3% to 8,16,848 Kwh, in comparison to the period April to December 2013. What this clearly tells us is that the demand for electricity has gone up by a very low 2.6% during the course of this financial year, in comparison to 8.3% a year earlier. This is a clear indicator of lack of growth in industrial demand. As industrial demand picks up, demand for electricity also has to pick up.

And how about railway freight? Between April to December 2015, revenue earning railway freight grew by 1% to 8,16,710 thousand tonnes, in comparison to April to December 2014. Between April to December 2014, revenue earning railway freight had grown by 5% to 8,08,570 thousand tonnes, in comparison to April to December 2013.

The railways transports coal, pig iron and finished steel, iron ore, cement, petroleum etc. A slow growth in railway freight is another great indicator of lack of industrial demand.

This brings us to the third economic indicator in the Li Keqiang index, which is the amount of bank loans disbursed, an indicator of both consumer as well as industrial demand. The bank loan growth for the period December 2014 to December 2015 stood at 9.2%. Between December 2013 to December 2014 the loan growth had stood at a more or less similar 9.5%. Bank loan growth has been in single digits for quite some time now. In fact, growth in loans given to industries stood at 5.3% between December 2014 and December 2015.

And what is worrying is that bad loans of banks have jumped up. Bad loans of banks stood at 5.1% of total advances as on September 30, 2015, having jumped from 4.6% as on March 31, 2015. The stressed loans of public sector banks as on September 30, 2015, stood at 14.2% of the total loans.

Hence, for every Rs 100 of loans given by public sector banks, Rs 14.2 has either been declared to be a bad loan or has been restructured. In March 2015, the stressed assets were at 13.15%.

Estimates suggest that over the last few years nearly 40% of restructured loans have gone bad. This clearly means that banks have been using this route to kick the bad loan can down the road. It also means that many restructured loans will go bad in the time to come.

Hence, the Indian economic growth story is looking ‘really’ weak when we look at the economic indicators in the Li Keqiang index. There are other high frequency economic indicators which tell us clearly that economic growth continues to be weak.

Exports have been falling for 13 months in a row. Between April and December 2015, exports fell by 18% to $196.6 billion. Non petroleum exports between April and December 2015 were down by 9.4% to $173.3 billion. The bigger point is that is how can the economy grow at greater than 7%, when the exports have fallen by 18%? In 2011-2012, exports grew by 21% to $303.7 billion. The GDP growth for that year was 6.5%. How does one explain this dichotomy?

Between April and December 2015, two wheeler sales went up by 1.05% to 1.42 crore, in comparison to a year earlier. Two-wheeler sales are an excellent indicator of consumer demand throughout the country. And given that the growth has been just 1.05%, it is a very clear indicator of overall consumer demand remaining weak.

In fact, the rural urban disconnect is clearly visible here. Motorcycle sales are down by 2.3% to 97.61 lakhs. Scooter sales are up 11.5% to 39 lakhs. Scooters are more of an urban product than a rural one. This is a clear indicator of weak consumer economic demand in rural and semi-urban parts of the country. Tractor sales fell by 13.1% between April to December 2015 to 4.12 lakh. This is another  indicator of the bad state of rural consumer demand.

One data point which has looked robust is the new car sales data. New car sales during the period April to December 2015, grew by 7.9% to 19.22 lakhs, in comparison to a year earlier. Between April to December 2014, new car sales had grown by 3.6% to 17.82 lakhs. The pickup in new car sales is a good indicator of robust consumer demand in urban areas.

Over and above this, not surprisingly, corporate earnings continue to remain dismal. If all the data that I have pointed up until now was positive, corporate earnings would have also been good.

The larger point is that if so many high frequency economic indicators are not in a good state, how is the economy growing at greater than 7% and how is it expected to grow by 7.6% during the course of this year. What is creating economic growth?

It is worth pointing out here that sometime early last year, the CSO moved to a new method of calculating the GDP. Since then robust economic growth numbers have been coming out, though the performance of high frequency economic indicators continues to remain bad. In fact, some economists have measured the economic growth rate between April and September 2015, as per the old method, and come to the conclusion that the growth is in the range of 5-5.2%, which sounds a little more believable.

To conclude, there is no way the Indian economy can possibly be growing at greater than 7%. Honestly, Indian economic growth data now seems to have gone the Chinese way—it’s totally unbelievable. And since we like to compete with the Chinese, at least on one count we are getting closer to them.

And there is more to come on this front in the time to come.

Stay tuned!

The column was originally published on the Vivek Kaul Diary on February 9, 2016

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

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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 economy this month

newspaperAn old adage in journalism goes: “if it bleeds, it leads”. But this doesn’t seem to apply to bad economic news. Allow me to elaborate. Let’s start with new car sales. New car sales are a reliable economic indicator which tell you whether the economy is starting to pick up.

People buy a car only when they feel certain about their job prospects. Further, once car sales pick up, sale of steel, tyres, auto-components, glass etc., also starts to pick up. 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.

The jump in the new car sales numbers was on the front page of the Mumbai edition of the leading pink paper where it was reported that sales saw a double digit growth in November 2015. Car sales in November 2015 went by 11.4% to 2,36,664 units, in comparison to November 2014. That is indeed a good jump and does indicate at some level that the consumer sentiment is improving.

But we need to take into account the fact that Diwali this time was in November and that always pushes up car sales. The December 2015 new car sales number will be a proper indicator of whether car sales have actually recovered or not.

Now contrast this with merchandise exports (goods exports) which fell by 24.4% to $20 billion in November 2015, in comparison to the same period last year.

Over and above this, the exports have been falling for the last twelve months. This piece of news was buried in the inside pages of the Mumbai edition of the leading pink paper. Exports are a very important economic indicator. Countries which have driven their masses out of poverty have done so by having a vibrant export sector.

Getting back to car sales. It is important to ask how important car sales are in the Indian context.  As per the 2011 Census, 4.7% of the households owned cars in India. At the same time 21% of households owned two-wheelers (scooters, motorcycles and mopeds (yes, they still get made and sold).

This tells us very clearly that two-wheeler sales are a better economic indicator in the Indian context than car sales. Many more people own two-wheelers than cars. Further, many more people are likely to buy two wheelers than cars given the fact that two-wheelers are more affordable.

And how are two-wheeler sales doing? Not too well. Two wheeler sales in the month of November 2015 went up just 1.47% to 13,20,561 units, in comparison to November 2014. The motorcycle sales went up by 1.57% to 8,66,705 units. Scooter sales went up by 2.45% to 3,96,024 units. And moped sales fell by 6.16% to 57,832 units.

In fact, the increase in two-wheeler sales in November 2015 in comparison to November 2014 stood at just 19,130 units. Whereas the increase in car sales was at 24,226 units. The increase in car sales was greater than two wheeler sales. And this is indeed very surprising, given that total two wheeler sales in November 2015, were 5.6 times the car sales.

You won’t find this very important point having been made in the pink papers. What does this tell us? It tells us that a large part of India is still not comfortable making what is for them an expensive purchase. It also tells us that the consumer demand at the level of the upper middle class (for the lack of a better term), which can afford to buy a car, is much better than it is for others.

The question is why is did the business media miss out on this? A possible explanation is that most of the business media these days is run out of Delhi. And in Delhi everyone owns a car, at least that’s the impression you are likely to get if you work in the media in Delhi. So car sales are important, two wheeler sales are not. But that is really not the case even in Delhi.

As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “In Delhi, according to data collected for the 2011 Census, 20.7 per cent owned cars and 38.9 per cent owned two-wheelers…In a conscious middle-class entity like Gurgaon, neighbouring Delhi…the credit rating agency CRISIL assessed that 30 per cent of households owned cars [and] 38.9 per cent owned two-wheelers.”

Long story short—two wheeler sales are a better economic indicator than car sales. What this also tells us is that any piece of positive news will be played up and highlighted on the front page whereas any piece of negative news will be buried in the inside pages. Why does this happen? Why did the media almost bury the news of very low growth in two-wheeler sales?

Satyajit Das has an explanation for this in his terrific new book The Age of Stagnation—Why Perpetual Growth is Unattainable and the Global Economy is in Peril: “Bad news is bad for business. The media and commentariat, for the most part, accentuate the positive. Facts, they argue, are too depressing. The priority is to maintain the appearance of normality, to engender confidence.”

Also, given that a business newspaper (or for that matter any newspaper) makes money from advertisements and not the price the buyers pay to buy a newspaper, this isn’t surprising.

Of course, you dear reader, need not worry, as long as you keep reading The Daily Reckoning.

The column originally appeared on The Daily Reckoning on December 17, 2015