Bank Of America-Merill Lynch Report Says New Metrics Hype India Q2 Growth

04/12/2015 12:56 PM IST | Updated 15/07/2016 8:25 AM IST
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Sahil Ahmed embroiders a delicate fabric at fashion designer Anjana Das' workshop in Shahpur Jat village in New Delhi, India, on Tuesday, July 24, 2012. The Indian economy expanded 5.3 percent in the three months ended March from a year earlier, the slowest pace since 2003. Photographer: Sanjit Das/Bloomberg via Getty Images

Though official numbers peg India's July-September quarterly growth at 7.4%, a Bank of America-Merill Lynch report says that it would have been only 5.2%, if the traditional method of calculation were employed. The point is significant because a numerically-strong 7.2% growth, according to the report, doesn't quite square with a trove of several, more pessimistic economic indicators. These include depressed demand, fewer consumer loans inspite of positive signals by the RBI and flat manufacturing output, all of which strengthen critics--within academia and range of analysts-- of the new method of GDP calculation.

The government has defended the new method (series) as being more broad-based and giving a more comprehensive view of the Indian economy. Moreover, GDP growth in the new series is lower than that measured on current price, mainly because wholesale inflation is negative. According to HSBC Global Research, GDP on current prices grew at 6% but the growth was 7.4% in real terms (at constant price) This means GDP was increased by 1.4 percentage points. "Nominal GDP grew at a much slower rate than real GDP implying that deflators (adjustment for inflation and other factors) have fallen sharply into the negative territory ," said the bank in the report.

In essence, the discrepancy between the so-called new and old series is that India's economic output has been un-reasonably extrapolated from a small base of companies This, according to critics, deviates from the established, statistical method of judging the state of the economy purely from data provided by these companies. Higher growth in 2013-14 is largely on account of the discredited scaling-up methodology, critics add.

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However the Central Statistical Organisation, which prepares these estimates, said that the "scaling up" was only a temporary practice and soon, such extrapolations wouldn't be required.

“From 2014-15, no scaling up will be required," CSO Director General, Ashish Kumar told Mint, "as the growth rate of companies between 2013-14 and 2014-15 will be taken as the overall growth rate for 2014-15.”

The BoA report goes on to add that even at Gross Value Added (GVA) term, the economy at current prices grew at 5.2% but the growth was 7.4% at constant price. Here, it is inflated by 2.2 percentage points. The bank said it seems that deflators have been underestimated in the new GDP series because services deflator has been "pegged more to WPI than CPI", which is in the positive territory.

India's latest Q2 data came a day ahead of RBI’s monetary policy review meeting on Tuesday, where the bank decided to retain lending rates. The agriculture sector grew at 2.2 per cent, higher than the 2.1 per cent growth witnessed in the corresponding quarter last year and significantly higher than 1.9 per cent growth seen in the quarter ended June 2015. The biggest growth over the previous year was seen in manufacturing sector and trade, hotel, transport, communication & services related to broadcasting as the two segments grew much faster than their growth in the corresponding period last year. While manufacturing grew at 9.3 per cent as against 7.9 per cent seen in Q2’15, the trade, hotel, transport, communication & services related to broadcasting grew at 10.6 per cent as against 8.9 per cent in the same quarter last year.

The weakest parts of the economy continued to be construction segment, defence and utility services such as electricity, gas, water supply. While the growth of construction slowed down from 8.7 per cent in September 2014 to 2.6 per cent in September 2015, the growth in utility services declined from 8.7 per cent to 6.7 per cent.

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