India’s growth data continues to confuse, says Nomura

Moneylife Digital Team 10 February 2015

According to Nomura, the sharp upward revision in India’s growth rate is due to a change in the estimation methodology. If the data is correct, then this suggests robust consumption and no need for any policy accommodation

Indian growth data continue to confound. Following the revision in annual real GDP growth in FY13 and FY14, the Central Statistical Organisation (CSO) has estimated that real GDP growth is expected to rise an even more robust 7.4% y-o-y (year-on-year) in FY15, from 6.9% y-o-y in FY14. The quarterly data for FY15 were accordingly revised higher by around 1.6% as compared with the old series. These observations are made in a research note from Nomura.

In Q4 2014, real growth rose 7.5% y-o-y, slightly lower than the 8.2% y-o-y in Q3 (Figures 1 and 2), owing to lower agricultural sector growth, which offsets the strong pickup in non-agricultural growth (mainly services).

Nomura said, “The sudden jump in growth rates is due to a change in the real GDP growth estimation methodology. Earlier, real GDP growth was estimated as a change in volume, while the new series estimates value added at each stage. Also, the government now uses sales tax, service tax and corporate performance data to estimate quarterly GDP. As a result of these changes, growth in industry (especially manufacturing) and the services sector (financial and real estate and government services) is much stronger in the new series.”

“If the numbers are correct, then the GDP data suggest that the economy has been rising at a much faster pace than estimated earlier and that potential growth in the Indian economy is still above 7%. However, the composition of growth is still biased towards consumption, while investment demand remains relatively sluggish, reducing the need for the Reserve Bank of India (RBI) to ease monetary policy,” Nomura argues in the research note.

“However,” Nomura said, “high growth does not square with other real activity indicators and the sharp moderation in inflation.”

Nomura’s assessment is that growth bottomed out in 2013-14 and is currently in the initial stages of a business cycle recovery. Based on the new series and the growth uptick indicated by forward-looking indicators, Nomura expects real GDP growth to rise to around 7.5-8.0% y-o-y in FY16.

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