Fastest growing yet difficult-to-predict Indian economy inspires new measuring tools

By: | Published: November 10, 2018 4:31 AM

The world’s fastest-growing economy is also one of the most difficult to decipher. A change in the methodology to calculate gross domestic product is partly why India’s data is puzzling and is prompting economists to find a workaround.

agriculture, agriculture sector,agriculture industryThe old series was easier to forecast for people outside of government because it was based essentially on an index of industrial production and the first estimates of agriculture.

The world’s fastest-growing economy is also one of the most difficult to decipher. A change in the methodology to calculate gross domestic product is partly why India’s data is puzzling and is prompting economists to find a workaround.

India’s new GDP series, introduced in 2015 with back-data available since 2012, relies more heavily on nominal indicators in two key areas relative to the old series, according to Abhishek Gupta, India economist with Bloomberg Economics in Mumbai. The lack of appropriate price indexes to deflate these nominal indicators now results in a greater separation of the new series from high frequency volume-based economic indicators, he said.

“This is more pronounced during periods of difference between retail and wholesale price indexes,” Gupta said. “That’s because it tends to generate a more faulty measure of the GDP deflator due to its over-reliance on the WPI index.”

The economy’s fastest expansion in more than two years in the June quarter was predicted accurately by only one of 44 economists surveyed by Bloomberg. The numbers have been way off estimates on at least three other occasions in as many years, and with data for the fiscal year second-quarter due Nov. 30, it’s anybody’s guess what it might throw up.
Gupta may have found the antidote to the GDP deflator measurement issues, with a new monthly growth tracker for India that compares more closely with the old GDP series. Indicators such as rainfall, auto sales and foreign tourist arrivals, co-relate more with the old series.

The tracker signals the economy’s growth momentum is fading.

BE’s Tracker compares better with old GDP series.

A separate Bloomberg dashboard of high-frequency indicators to track the animal spirits in the economy also showed economic growth may have retreated from the 8% plus pace seen in June.

Old is gold

In 2015, India changed the way it measured the size of the economy — the base year was shifted to 2011-12 from 2004-05 among other revisions. The intention was to capture latest developments including the replacement of obsolete items such as typewriters that have made way for smart devices.

Even as economists await a back-series or comparable data for the last revision, the statistics ministry is on the cusp of changing the base year to 2017-18 to reflect changes in the economy. Like Gupta, other economists are also looking at various data sets to get a better pulse of the economy. Mumbai-based brokerage Ambit Capital has it own index.

A member of the Reserve Bank of India’s rate-setting panel also questioned the new GDP series. He believes the statistics office is overestimating manufacturing output by replacing the Annual Survey of Industries with corporate financial data in the new series.

The 8% plus growth is puzzling at a time when export growth is weak, farmers say they are in distress and there isn’t data to show enough jobs were created.

The old series was easier to forecast for people outside of government because it was based essentially on an index of industrial production and the first estimates of agriculture. In the new series the government has added quarterly results of listed companies and sales tax data, which isn’t available in the public domain, said Pronab Sen, country director for the India Programme of the International Growth Centre.

“The people who are predicting are now working with a smaller set of primary data than the statistics office is,” said Sen. “There’s a lot of volatility in quarterly figures because the data set on which these figures are based aren’t particularly robust.”

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