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India's growth forecast puzzles 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 11 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 Mr 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.

"Growth has bottomed out at the beginning of this year and it is likely to look better going forward," Radhika Rao, an economist with DBS Bank Ltd. in Singapore, said before the data. "But the sharp revision in data doesn't square up with the high frequency indicators that have been coming out." 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 is Asia's best performer this year.

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The annual rate would match China's 7.4 per cent growth in 2014.

Mr 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 Jan 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.

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.

"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.

Mr 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.

"The budget will provide the blueprint for growth for the next few years," said Shubhada Rao, a Mumbai-based economist at Yes Bank Ltd. "Investment revival through public spending will be a cornerstone of the budget proposals."