Doubts over data: Economists remain sceptical as government projects GDP at 7.4%

The revised numbers show quarterly growth reached 8.2% in the second quarter and is pegged at 7.5% in the third. Numbers based on the new series were first released at the end of January, showing a much better performance in FY14 over the old one.

The GDP data release is one of the events that Reserve Bank of India Governor Raghuram Rajan said he would be watching before deciding on the future course of monetary policy

At the February 3 monetary policy announcement, he referred to the improved growth figure for fiscal 2014 and said he found it hard to see the economy as having been “rollicking”. He went on to say that “we need to understand (the data) better”. He also stuck to the old series for RBI’s forecast: “The baseline projection for growth using the old GDP base has been retained at 5.5% for 2014-15.”

Rajan kept interest rates unchanged on February 3, having effected a surprise cut on January 15 and said his future policy moves would hinge on data — GDP numbers on February 9, retail inflation three days after that — and the February 28 Budget that will provide a clear picture of the government’s finances

Experts questioned the latest numbers saying they were not consistent with poor corporate results, muted car sales and other high-frequency data. Larsen & Toubro, a bellwether company, on Monday reported a lower-than-expected consolidated 9% rise in net profit amid narrower margins.

“These numbers were unanticipated. The old series and the new series seem to be telling two different stories. With the new series it is difficult to say if the economy has actually revived or not,” said Abheek Barua, consultant at the Indian Council for Research on International Economic Relations (Icrier), a think tank. “The numbers need careful analysis before using them for policy-making. I am at a loss as an economist to draw meaningful conclusion from these numbers.”

The earlier series showed the economy was struggling to touch 5.5% with a 0.7% contraction in manufacturing last fiscal year while the new one reflects robust overall economic growth, including in manufacturing. GDP growth for FY14 was revised to 6.9% from 4.7%.

National Statistics Commission Chairman Pronab Sen strongly defended the data, explaining that GDP measures value addition, which can come from efficiency gains.

He said final corporate tax payments will bear this out.

The data show a substantial improvement in investment and demand in the economy. Gross fixed capital formation, a proxy for investment, is estimated to grow by 4.1% in FY15 against 3% in the last fiscal. Similarly, private final consumption expenditure, which indicates demand in the economy, is estimated to expand by 7.1% this fiscal versus 6.2% last year.

Industry too is baffled, especially since it undermines the argument for rate cuts and government stimulus measures. Still, there were some aspects that could be addressed

“The Union Budget may consider some measures to revive investment, particularly in the sectors that are experiencing slowdown,” the Confederation of Indian Industry said in a release. “Further, the data show significant moderation in inflation as measured by the GDP deflator, which should provide comfort to RBI in reducing interest rates to amuch greater extent.”

Growth in the agriculture sector has been pegged at 1.1% although FY15 was a rainfall-deficit year. The 10% growth estimated for the services sector has also raised eyebrows as credit growth remained low, suggesting that real investment activity was yet to take off

“The 10% services sector growth is difficult to understand,” said Ghosh of SBI. “The data has taken into account production taxes, which push up numbers even if there is no production on the ground.”The manufacturing sector, the share of which has increased to more than 17% in the new series, is estimated to post 6.8% growth this fiscal, up from 5.3% in FY14.

The third quarter saw the lowest manufacturing growth this fiscal at 4.2%, against 6.3% and 5.6% in the first two quarters, respectively. Public administration and defence services posted a 20% growth in the third quarter, indicating increased expenditure on defence and other key ministries.

“The robust growth revealed by CSO (Central Statistics Office) suggests that rate cuts by the central bank are unlikely to exceed 50 bps (basis points) over the next few quarters,” said Aditi Nayar, senior economist, ICRA. A basis point is one-hundredth of a percentage point.