India’s economy growing at a rate of 7.3% but numbers “overstate strength of economy”

8th February 2016


India’s economy grew by 7.3% on an annual basis between October and December, faster than most had anticipated.

In addition, there were also sizeable upward revisions to estimates of growth in the preceding two quarters.

Growth in the second is now estimated at 7.6%, up from 7% while growth in the third quarter is now thought to be 7.7%, previously 7.4%.

The numbers for the final three months of the year were ahead of expectations, where the Bloomberg median forecast was 7.1%.

Capital Economics noted that the strongest contributor was private consumption, which grew 6.4% year-on-year (y/y), contributing roughly half of the overall growth in spending.

An 11% y/y fall in real imports boosted the contribution of net trade to growth, though exports fell too.

But on the downside, fixed investment slowed sharply, knocking 1.6 percentage points off headline GDP growth.

Capital Economics Shilan Shah said that at face value these are extremely strong figures but he added that bigger doubts arise when he tries to align the GDP data “with what we know of the economy’s health from other sources”.

He said: “If private consumption is booming, then why don’t more direct measures of household spending show it? One example is auto sales, which have been weak since the middle of last year.

“Meanwhile, growth in bank lending remains close to its slowest rate in over a decade. The short point is that we should take the official GDP data, and the rate of growth they are suggesting, with a pinch of salt. We continue to await greater clarity.

“The Statistics Office previously said that it would extend the GDP data series to make it easier to judge recent figures in a historical context but further details have not been forthcoming. “

In terms of the policy implications, he does not expect the latest data to have any impact.

Shah added: “The Reserve Bank of India has also expressed doubt about the quality of the GDP data and, like us, appears to be putting more emphasis on alternate measures of activity.

“As it happens though, given that inflation has picked up recently and that the RBI faces a tough challenge in meeting its medium-term inflation target, we think that it will keep interest rates on hold at 6.75% throughout 2016. “

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