India GDP seen surging 7.4% in data that has puzzled economists

[NEW DELHI] India forecast its growth will accelerate this fiscal year under a revised method for calculating gross domestic product that has confused economists since it was unveiled 12 days ago.

The economy will grow 7.4 per cent in the year through March 31, aided by a 7.5 per cent increase in October-December, the Statistics Ministry said in New Delhi on Monday. Last month it revised the previous year's expansion to 6.9 per cent from 4.7 per cent, prompting economists including Reserve Bank of India Governor Raghuram Rajan to question the growth surge.

The uncertainty surrounding the data makes it unclear how much room Rajan has to lower interest rates as Prime Minister Narendra Modi's government prepares to reveal its first full- year budget on Feb 28. A faster expansion risks stoking inflation and reducing the 75 basis points in rate cuts that swaps traders are pricing in from the central bank by December.

"If the economy is indeed expanding as fast as the revised estimates show, then the slack in the economy is not as significant and private consumption more robust than the previous data suggested," Radhika Rao, an economist with DBS Bank Ltd. in Singapore, wrote in a note on Tuesday. "This implies little headroom for further monetary easing." Global investors bought an unprecedented US$42 billion of Indian shares and bonds in 2014, boosting the benchmark stock index to a record on optimism monetary easing will help Modi boost investment. The rupee, Asia's best performer this year, extended gains in the offshore market after the data.

India's quarterly expansion outpaces China's 7.3 per cent in the same period, and the annual rate would match China's 7.4 per cent growth in 2014. The last time India was growing so fast was when it surged 8.9 per cent in the year through March 2011, according to data compiled by Bloomberg that's based on the old series.

India "does not look and feel like a 7.5 per cent growth economy," said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai. "We don't understand this growth very well; it will take a lot of triangulation." Rajan retained the central bank's forecast of 5.5 per cent expansion in 2014/15 using the old method for calculating GDP when he held interest rates on Feb. 3 after an unscheduled cut three weeks earlier. He added that it could be revised after officials study the new data.

Consumer price inflation will be "around" the central bank's goal of 6 per cent by January 2016, he said, shifting slightly from Jan 15 guidance that the rate will be below target. He said the monetary authority will monitor government revisions to base prices and weights when calculating inflation rates starting with data due Feb 12.

India is the only big emerging market to see total investment as a percentage of the economy fall over the past decade, according to data from the International Monetary Fund. It declined to 32 per cent of GDP last year, compared with a six- percentage-point rise to 48 per cent in China.

"We find it hard to see the economy as rollicking in 2013/14," Rajan told reporters last week. "It's premature to take a strong view based on these GDP numbers." Although the government's data shows a surge in expansion, growth in industrial production slowed to an average 1.5 per cent each month in 2014 from 4 per cent in 2010-2013. A private purchasing managers index signals output slowed in January.

Manufacturing output rose 4.2 per cent in October-December, mining 2.9 per cent, trade and hotels grew 7.2 per cent, and financing and insurance surged 15.9 per cent, Monday's data showed. The farm sector contracted 0.4 per cent.

Larsen & Toubro Ltd, India's biggest engineering company, on Monday reported October-December sales and net income that missed analyst estimates. The stock lost 6.6 per cent, the worst performance on the benchmark equity gauge, after the company cut its full-year order outlook to 15 per cent to 20 per cent, from 20 per cent previously.

"I am puzzled by the GDP growth numbers and, consequently, all the constituent elements that went into constructing it," Arvind Subramanian, the Finance Ministry's top economic adviser, said in an interview with Business Standard newspaper published Feb 3, referring to the 2013/14 revision. "We have to be very careful in using these numbers for policy making." Since the revisions left the size of the economy unchanged, they won't affect the budget deficit as a percentage of GDP, according to Subramanian and the Statistics Office. Finance Minister Arun Jaitley said on Jan 22 that he's committed to narrowing the shortfall to 4.1 per cent of GDP in the current fiscal year and eventually get it below 3 per cent.

Rajan said the next policy move will hinge on inflation data and "high-quality" fiscal consolidation. While he isn't looking at a specific number or path in Modi's budget, re- channeling "mistargeted" spending toward capital expenditure that creates supply would help contain inflation and be a positive, he said in an interview with Bloomberg TV India.

India last month changed it's method of calculating growth by shifting the base to 2011-12 market prices rather than the previous method of using 2004-05 factor costs. It also expanded its database by including taxes and reporting from more companies and government bodies.

When the IMF last month revised its economic forecasts, it barely changed its outlook for India while slashing China's for this year and next. It predicts India will grow 6.5 per cent in the year through March 2017 compared with China's 6.3 per cent in the 12 months through December 2016.

The projection for India is based on the government's old database and therefore isn't comparable to the latest revisions.

The revised GDP data is unlikely to deter the government from moves to boost spending and investment, or to make the central bank more hawkish, Deutsche Bank AG economists Taimur Baig and Kaushik Das said in a Feb 9 report.

"We are unsure about how to reconcile this new data with indicators that show companies struggling with earnings and investment, banks seeing rising bad loans, credit growth slowing, and exporters reporting negative growth," they wrote.

BLOOMBERG