Taken at face value, India will post robust quarterly growth figures on Monday, but changes in the way Asia’s third largest economy is measured has left analysts and the government’s own chief economic advisor, Arvind Subramanian, doubting how far the data can be trusted.
Just over a week ago, everyone was working under the assumption that India was still struggling to gather momentum under Prime Minister Narendra Modi’s reform-minded government. Prior to Modi’s election in May, the economy had endured its weakest phase of growth since the mid-1980s.
Then India’s statisticians re-worked the numbers, changing both the way it calculates gross domestic product and the base year. Suddenly the economy appeared to be motoring again.
Growth for 2013/14 was put at 6.9 percent, way above the 4.7 percent previously reported. Unfortunately, the overall size of the economy shrank slightly, somewhat spoiling the story.
Surjit Bhalla, chairman of Oxus Investments and a former World Bank economist who has served on several government committees, distrusted the reliability of the Central Statistical Office’s new data series.
“Why question the surge in GDP growth in 2013/14? Because the CSO revisions do not pass a basic smell test,” Bhalla wrote in the Indian Express on Saturday, particularly questioning data for investment and government consumption spending.
On Monday, India will report GDP data for the quarter ending in December, and recalculate growth, using the new method, for the first half of fiscal 2014/15, having originally reported it at 5.5 percent. It will no longer provide data based on the old formula.
The changes have left economists groping for a trend.
“The revisions have yet to be applied to quarterly data from this fiscal year, meaning that the latest GDP numbers are redundant for now,” said Shilan Shah, India Economist at Capital Economics.
The CSO will also give its expectations of growth for the full year.
Using the old methodology, the Reserve Bank of India (RBI) has projected growth of around 5.5 percent for the fiscal year ending in March. Analysts at Nomura now expect that to be bumped up to around 6 percent under the new method.
Other indicators, however, such as industrial production and trade, suggest the economy is still suffering from slack.
India now measures GDP by market prices instead of factor costs, to take into account gross value addition in goods and services as well as indirect taxes. The base year has been shifted to 2011/12 from 2004/05 earlier.
The statistics department says the new way is more in line with global practices and gives a better picture of economic activity.
The statistical fog will be a problem for Finance Minister Arun Jaitley as he drafts an annual budget that could be crucial to lifting the economy out of a lengthy rut.
Presenting the 2015/16 budget on February 28, Jaitley is widely expected to boost capital spending and offer tax breaks to an under-performing manufacturing sector.
The revised GDP data may make it harder for Jaitley to assess the size of the fiscal stimulus required to help restore the economy to the even higher growth rates needed to generate jobs for millions of young Indians entering the labour force.
The government’s chief economic adviser, Arvind Subramanian, has warned against framing policies based on the recent revisions, which he branded “mystifying”.
“I am puzzled by the new GDP growth numbers,” he told a newspaper last week.
While falling global oil prices, cooling inflation and interest rate cuts are expected to boost demand and improve the economic outlook, listless corporate spending and mounting bad loans at Indian banks remain a drag.
The central bank’s monetary policy switched to a new easing cycle in January with its interest rate cut for 20 months, while the rupee currency has been one of the best performers among Asian emerging markets, helped by a lower oil import bill.
“We may be reaching the outskirts of the woods but we are not out of the woods yet,” RBI Governor Raghuram Rajan said last week. “So I don’t think any data that suggests we are out of the woods at this point, we would put too much weight on it.”