The recently released GDP growth figures at 7.5% have put India's growth ahead of China. But they have become a subject matter of lot of controversy.
This story from The Economic Times states the industry is not seeing significant IIP growth despite the strong GDP figures. Link to the story
A part of this controversy is arising from the revision of the GDP calculation formula in January this year. Earlier the GDP used to be calculated as sum total of goods and services produced + sum total of goods and services consumed + sum total value of infrastructure capacity built (such as high speed rail, free ways and bridges.) The revised formula calculates the GDP using corporate income as has been highlighted in this story from The Hindustan Times: Link to the story
Excerpt - “In January the Central Statistics Office (CSO), using a new method, said that India’s real or “inflation adjusted” GDP in 2013-14 grew 6.9% instead of the earlier 4.7% and by 5.1% in the year before compared to 4.5% in the earlier system.
Advance estimates for 2014-15 released in February projected India’s GDP during the year to grow at 7.4%, making it the world’s fastest growing economy surpassing China.
This has stumped both experts and the non-initiated.
Data from other sources such as household spending, corporate earnings and tax collections and sales of goods and services are weak and do not mirror the revival trends seen in the GDP numbers.”
Many of the banks are also sceptical of the new GDP figures as is highlighted in this story from DNA: Excerpt: "Pranjul Bhandari, chief India economist, HSBC, said in a note, “Is growth picking up? The common answer is: depends. Depends on who you ask, what indicators you look at and, more recently, how much you buy into the new GDP series.” “Here is a quick stab at the question. Relying on the more trusted indicators, 60% of GDP is still in the woods. Agriculture, construction, banking and public administration are not showing signs of improvement. On the other hand, the remaining 40% of GDP, comprising of manufacturing, utilities and trade/transportation, has inched up from depressed levels, though upticks are gradual at best,” Bhandari added." Link to the full story
While GDP numbers may not matter so much to the viewers, the RBI sets its benchmark rate based on the GDP figures. This bench mark rate affects the rates in the savings accounts of banks and is designed to either spur spending or incentivize saving. A rate above the nominal rate would incentivize saving and such a policy would be termed "contractionary" and a rate below the nominal rate would be termed "expansionary" as it would spur spending. The nominal rate is the rate at which saving = spending. This is the rate that the RBI tries to target.
If the GDP does not reflect the household income anymore, how is the RBI going to set the benchmark rate? This is the million Rupee question puzzling Raghuram Rajan right now who made a statement - "We moved a little forward by saying that we are going to cut rates despite these risks.. based on how these risks evolve we will take a view. It's not a shut door, its a contingent statement"
This story from The Economic Times states the industry is not seeing significant IIP growth despite the strong GDP figures. Link to the story
A part of this controversy is arising from the revision of the GDP calculation formula in January this year. Earlier the GDP used to be calculated as sum total of goods and services produced + sum total of goods and services consumed + sum total value of infrastructure capacity built (such as high speed rail, free ways and bridges.) The revised formula calculates the GDP using corporate income as has been highlighted in this story from The Hindustan Times: Link to the story
Excerpt - “In January the Central Statistics Office (CSO), using a new method, said that India’s real or “inflation adjusted” GDP in 2013-14 grew 6.9% instead of the earlier 4.7% and by 5.1% in the year before compared to 4.5% in the earlier system.
Advance estimates for 2014-15 released in February projected India’s GDP during the year to grow at 7.4%, making it the world’s fastest growing economy surpassing China.
This has stumped both experts and the non-initiated.
Data from other sources such as household spending, corporate earnings and tax collections and sales of goods and services are weak and do not mirror the revival trends seen in the GDP numbers.”
Many of the banks are also sceptical of the new GDP figures as is highlighted in this story from DNA: Excerpt: "Pranjul Bhandari, chief India economist, HSBC, said in a note, “Is growth picking up? The common answer is: depends. Depends on who you ask, what indicators you look at and, more recently, how much you buy into the new GDP series.” “Here is a quick stab at the question. Relying on the more trusted indicators, 60% of GDP is still in the woods. Agriculture, construction, banking and public administration are not showing signs of improvement. On the other hand, the remaining 40% of GDP, comprising of manufacturing, utilities and trade/transportation, has inched up from depressed levels, though upticks are gradual at best,” Bhandari added." Link to the full story
While GDP numbers may not matter so much to the viewers, the RBI sets its benchmark rate based on the GDP figures. This bench mark rate affects the rates in the savings accounts of banks and is designed to either spur spending or incentivize saving. A rate above the nominal rate would incentivize saving and such a policy would be termed "contractionary" and a rate below the nominal rate would be termed "expansionary" as it would spur spending. The nominal rate is the rate at which saving = spending. This is the rate that the RBI tries to target.
If the GDP does not reflect the household income anymore, how is the RBI going to set the benchmark rate? This is the million Rupee question puzzling Raghuram Rajan right now who made a statement - "We moved a little forward by saying that we are going to cut rates despite these risks.. based on how these risks evolve we will take a view. It's not a shut door, its a contingent statement"
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