Economy: India GDP revision: More questions than answers :: Kotak Securities

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India GDP revision: More questions than answers. The good parts of the GDP revision are (1) base year shift to FY2012 from FY2005 should technically show a more accurate picture of the economy and (2) the move towards GDP at market prices as the official GDP estimate and improvements in methodology make it globally comparable. However, the sharp revision of GDP growth in FY2014 to 6.9% compared with the earlier print of 5.0% (without comparable revision for FY2013) can pose serious policy questions. We await historical higher-frequency data to assess the true picture.

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Policy conundrum—greater clarity awaited through incremental data releases The old series showed a very gradual improvement in the GDP growth (at market prices) in FY2014 (5.0%) over FY2013 (4.7%). The new series (with change in base year and GDP definitions), indicates a sharp improvement in the growth trajectory—FY2014 at 6.9% and FY2013 at 5.1% (Exhibit 1). Though this uptick could stem from a conceptual change in moving to a basic prices-based calculation from a factor-cost-based one (explained later), prima facie the uptick would suggest that growth recovery has been faster than expected. This raises a crucial question of whether the output gap has been closing faster than anticipated (given that potential GDP growth is seen at 6.0-6.5%), which risks stoking inflationary pressures earlier than expected from a growth recovery in the near to medium term. This could imply that policy easing would have to be much more calibrated than currently expected. However, we need further details before such concerns can be validated. Real economy indicators do not corroborate with the magnitude of revisions IIP growth (which also needs to be rebased) in FY2014 was at (-)0.1% compared to 1.1% growth in FY2013. This is clearly in contrast with industrial sector (ex-construction) GDP growth of 5.1% in FY2014 against 5.0% in FY2013 in the new series. Even more surprisingly, mining sector growth in FY2014 is at 5.4% and manufacturing sector growth is 5.3%, which is difficult to corroborate with any other macroeconomic indicators. Other key indicators such as capacity utilization and automobile production data point to considerable slack in the economy (Exhibits 2–4). The release of advance estimates of FY2015 GDP growth and 3QFY15 GDP data are likely to provide a clearer picture of the actual trajectory. Methodology change can partly explain the growth pick up For the purpose of GDP estimation, data for mining, manufacturing and services has been compiled using the annual accounts of companies filed with the Ministry of Corporate Affairs. According to the press release, this has contributed to a significant increase in the growth rate of the mining and manufacturing sectors. Similarly, for non-financial services, sales/service tax has been used as an indicator for nominal growth along with a shift to the new CPI series from CPI series for agriculture/rural/industrial workers. For FY2014, the industrial sector’s share has increased to 30.7% in the new series from 24.7% in the old series, though this share has fallen over time (Exhibit 5). It is apparent that (1) the shift in the industrial sector’s share along with higher real growth and (2) higher growth in non-financial services due to a change in the estimation procedure are likely to have contributed to the sharp uptick in GDP growth in FY2014 (Exhibit 6). On the expenditure side, households’ savings in physical assets would now include purchase of valuables (gold, etc.).

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