Data shows Indian growth outstrips China’s but economists doubtful

30 May 2015 | Author: | No comments yet »

All factors, barring uncertain monsoon, remains valid for our projection of 8.1-8.5 % growth in FY’16: Arvind Subramanian.

A day after India’s economy grew 7.3 per cent in 2014-15, slightly lower than 7.4 per cent calculated in advance estimates primarily due to almost flat output in farm sector chief economic adviser Arvind Subramanian says projections of 8.1-8.5 per cent for the current financial year holds ground.New Delhi: By posting 7.5% GDP growth for the January-March 2015 period, India has emerged as one of the world’s fastest growing economy, outstripping China’s 7% growth in the same quarter,according to data released by the government on Friday .NEW DELHI: The Indian economy expanded 7.3% in the year ended March, in line with the initial forecast and marginally higher than 6.9% recorded in the previous year, pointing to a soft recovery and strengthening the case for a rate cut on June 2 when Reserve Bank reviews monetary policy. He tells Indivjal Dhasmana that all the factors leading to those projections by the Economic Survey of 2014-15 are vaild, with a possible exception of the monsoon, which is still uncertain.

For the Reserve Bank of India (RBI), which will announce its monetary policy on Tuesday, the GDP numbers are unlikely to claim any major influence on its rate cut stance. India also celebrated faster growth than its larger neighbour in the December quarter, but on Friday the Central Statistics Office sharply revised growth down to 6.6% from 7.5%, further distorting the picture.The sharp downward revision for the previous quarter has fuelled doubts about the accuracy of a new method used to measure economic activity. Economists were already having a hard time reconciling the headline numbers with dismal corporate earnings, weak industrial activity and an elusive recovery in bank credit. Had this been a normal agricultural year, I feel that growth may have been even higher,” Subramanian told the media. “Manufacturing has not only picked up from last year, it has also picked up from the third quarter of this year. Now, if one accepts the current government’s 7.3 percent as true then one has to accept the previous government’s 6.9 too because methodology and numbers are neutral quantities.

China’s economy expanded 7.4% in the 2014 calendar year. “There is a huge scope with all the steps the government has taken and will take in the course of the year. The services sector has grown from 9.1 percent to 10.2 percent,” he added. “The GDP figures for the year ending on March 2015 are in, and the growth is 7.2 percent at basic prices and 7.3 percent at market prices. The logic of the 2015-16 forecast was that growth would be greater in 2015-16 relative to 2014-15 by a margin greater than growth in 2014-15 was over 2013-14. Our potential to grow into a higher league is certainly there,” FM Arun Jaitley said, adding the economy had been held back by the agriculture sector because of a poor monsoon last year, calling for greater investment in irrigation. The reasons for that increase were: lower oil prices; cumulative impact of reforms; easier monetary conditions; smaller fiscal consolidation; and a less-bad monsoon.

It could be argued that the gap between the potential of the economy and actual delivery is massive, but that’s a matter of subjective interpretation. But the Statistics Office’s reworking of the numbers has transformed India’s official growth pace under Prime Minister Narendra Modi, who made economic reforms a priority during his first year in office. “I think there are methodological issues. The encouraging part of the data is the growth in manufacturing to 7.1 percent from last year’s 5.3 percent which means we are creating jobs in our growth path,” he said. This is when China has decelerated from 10 percent plus in the last three decades to the sub eight territory in recent years and looks set for a prolonged low growth period, the US is still reviving at five percent and the rest of the world is performing poorly.

The common undercurrents there are that a recovery is taking place, but it has been a very gradual process. “To that extent, the recovery trend will be interpreted as modestly positive and not as strong as the new headline GDP seems to suggest. Let’s take out the argument that China and the US are multi-trillion dollar economies and from their base a growth of five percent is much bigger than India’s eight percent; the same way you cannot compare Bihar’s growth with Gujarat’s. We reckon Tuesday’s rate cut is still on the table. “This data is based on value-added, so it is difficult to feel and correlate with what is happening to high frequency data like credit growth, rural and urban wages and passenger car sales, which are all still weak. “RBI will have to feel its way in the economy to get an idea about prices and be confident about their inflation projection.

What the numbers suggest is India has managed to maintain a steady growth momentum despite the blip over a couple of years due to global headwinds and policy chaos at home. In contrast, trade, hotels, transport, communication and services relating to broadcasting grew at 10.7 per cent, while financial, real estate and professional services grew at 11.5 per cent. In particular, experts are concerned with the 9.5% growth in credit in FY15 and the 2.8% rise in factory output as measured by the Index of Industrial Production (IIP), which they say is not consistent with the high GDP growth.

The Narendra Modi government’s push to the manufacturing sector through the Make in India initiative and its emphasis on infrastructure as the vehicle of growth are likely to place the country in a trajectory where China used to be not long ago. Also with the US economy contracting in the first quarter of 2015, do you think we will have contraction in merchandise exports for many more months now? Given that higher public spending is key to reboot growth, the NDA’s obsession with fiscal deficit numbers is something that can potentially delay the growth recovery on the ground.

The numbers showed a slight pickup in investment as well with gross fixed capital formation, a measure of investment, rising 4.6% in FY15 compared with 3% in FY14. The numbers may please rating agencies and investors but without percolation of the benefits of the growth process deep enough it guarantees no political return. Even though numbers of the first two quarters were also released, the revisions were, albeit, marginal. “The downward revision in Q3 suggests some loss of momentum began in the second half of FY2015. But the fiscal picture will be better this year, consumption demand boosted by oil prices and easier monetary conditions, and hopefully the pick-up in investment can be sustained, especially if public projects can be implemented quickly and resolution of the stalled projects Many experts say a turnaround shown in industry, particularly manufacturing, does not mirror the ground reality.

The GVA (gross value added), however, has a different story to tell, showing a marked sequential slowdown from Q2 onwards, implying that larger growth has come on account of net taxes on products,” Reuters quoted Yes Bank chief economist, Shubhada Rao as saying. Manufacturing growth picked up further in the January-March period, rising to 8.4%, but construction slowed to 1.4% and agriculture contracted 1.4% because of the damage caused by unseasonal rains in March.

The prime minister and Finance Minister Arun Jaitley have been facing flak from even their biggest supporters for being incrementalists in their approach rather than being bold. The factory output numbers for the recent months, bank credit growth and the movement trend of the stressed assets in the banking system indicate things haven’t really improved. The statistics department dismissed concerns over data. “The MCA (ministry of corporate affairs) database allows us to capture a wide range of smaller and medium enterprises unlike earlier when only 5,000 listed companies would be tracked. The stark contrast between the GDP figures and ground reality should be questioned. “The higher growth number in value added in sectors like manufacturing and services like finance, trade, transport, etc. have pushed growth up.

There were large revisions in numbers when ASI (Annual Survey of Industries) data would come out earlier because it provided larger coverage,” Anant said. But these are volume indicators and at a time when input prices are declining substantially—recall that the level of wholesale prices has declined (negative inflation) 6 months in a row–volume indicators could be under-stating value-added growth.

However, these numbers do not adequately reflect the lower growth numbers in IIP (Index of Industrial Production) or the banking business numbers,” a note from rating agency, Care, said. The second reason, as I explained in my press conference on Tuesday, is that April indirect tax data show a healthy increase in collections (of about 9.8 percent), stripped of all the new tax measures.On reasonable assumptions about tax buoyancy, these collections are consistent with real and nominal GDP growth of the magnitude that we have forecast for 2015-16.The one indicator which suggests continuing weakness even in manufacturing, is, of course, corporate profits. On the other side, banks are sitting with bad loans of over Rs 3,00,000 crore on their books and a substantial chunk of restructured loans, which together constitutes over 12 per cent of the total bank loans given. While nominal credit growth has declined, real credit growth (i.e. growth adjusted for inflation) has been constant and perhaps even shown a slight uptick. Data sourced from corporate debt restructuring cell (CDR), a forum of banks that takes up cases of large restructuring proposals, shows that Rs 57,000 crore worth restructured assets were tagged as failed loans and accounts that failed to recover despite recasts, at the end of March quarter.

Their cheerleaders would like the Modi-Jaitley duo to go for political confrontation to push through a radical economic agenda to pitchfork growth to a higher orbit. We have seen that the stalling rate of projects has declined but the key question is whether new investments—both in the public and private sectors–are witnessing a strong turnaround.

There is gradual realization that confrontation does not help, particularly when there are more areas of convergence than divergence in economic thinking among a large section of the political class.

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