New GDP calculations chart a “V shaped” recovery for India but raise pertinent questions

Summary

India’s newly revised GDP calculations stun widely-held perception that the economy is long struggling to return to a high growth path, having grown at a low 5% annual rate over the past three years. Instead, revised GDP data suggests that India saw a dramatic “V shaped” recovery during the fiscal year ending March 2014 (FY14) and that its real GDP growth has possibly surpassed China’s over the past year. Under the new methodology, India’s real GDP growth in FY15 is estimated at 7.4% y/y, compared to 6.9% y/y in FY14, driven by private and government consumption expenditure, which together offset subdued investment activity and slowing external demand. On a quarterly basis, India’s GDP growth slowed to 7.5% y/y last quarter (4Q14) from 8.2% y/y in Q3 as per the new methodology. Prima facie, the new GDP methodology might have helped India catch up with China on paper. It however raises several pertinent issues that undermine the methodology’s robustness and warrants further clarifications and incremental data to estimate India’s GDP growth trajectory going forward. In particular, the new growth out-turns do not corroborate with higher frequency indicators and ground level evidences that reflect broad economic under-performance over the past three years. This is characterized by falling capacity utilization, slack in motor vehicle sales, slowing credit growth, rising non-performing loans of the Indian banking sector and an overhang of stalled infrastructure projects. Meanwhile, the sharp revision in India’s GDP growth has important implications for RBI’s monetary policy reaction function, particularly driven by its assessment of India’s output gap. That said, given ongoing dis-inflationary trends and on-ground evidence of a much more gradual recovery, we expect RBI to stick to its ongoing policy easing cycle conditional on prudent fiscal management by the government. Against this backdrop, we continue to expect additional 50 bps easing in policy rates by the RBI in 2015 with a likely 25-50 bps rate cut at its next policy meeting on 7th April.

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