India's growth could be much lower than reported! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

India's growth could be much lower than reported! 

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In this issue:
» Your tax money misused to oblige political connections
» Reckless govt spending does not lead to prosperity
» Will the RBI cut interest rates now?
» Is the world heading towards a 2008-like crisis?
» ...and more!

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If you would recall, just last year the government had forecast that the Indian economy would grow at 9-9.5% over the coming five years. We all know how distant the government has been from reality. This distance only widened further when the GDP estimates for Jan-March 2012 quarter were announced last week. At 5.3%, India's economy grew at the slowest pace in 9 years.

But is the figure published by our apex statistical ministry- the Ministry of Statistics & Programme Implementation (MoSPI) - really reliable? An article we came across in a financial daily pointed out some suspicious facts. As it turns out, the official fourth quarter GDP data released by the government included a surplus of US$ 10 bn in the external trade account (It must be noted that the external trade balance is exports minus import of goods and services). However, data released by the commerce ministry shows that during the fourth quarter, there was a goods trade deficit of US$ 44 bn. This means that for the trade balance to be a positive US$ 10 bn, services would have to generate a surplus of US$ 54 bn. But this seems quite unlikely because the highest quarterly services surplus that India has ever achieved is just US$ 15 bn. So if we assume that the services surplus would be somewhere in this region, India would actually have a trade deficit instead of a surplus during the quarter. And in that case, our GDP growth would have tanked to about 1.5% instead of the official figure of 5.3%.

It is not at all surprising that official data often comes with high degrees of error. On several occasions, the government has had to accept the flaws in its data and correct the errors. In the past, it had to rework GDP data for the April-June 2010 quarter. Industrial production data for January 2012 had to be rectified. Even foreign trade data for several months of the financial year 2011-12 had to be reworked.

This exposes the serious faults and deficiencies in the government agencies. It is indeed very disappointing given the fact that government data is very critical in the decision-making process of households, corporations and even policymakers. What is even worse is that a lot of your hard-earned money is going down the drain. For instance, each of the 34 million Indian taxpayers pays Rs 1,500 per annum for all such data released by the Indian government.

According to you, is the government data flawed or fudged? Share your comments with us or post your views on our Facebook page / Google+ page.

01:25  Chart of the day
Public sector carrier Air India has been in troubled waters for quite some time. The main reason for all its problems seems to be its highly inefficient operations. As today's chart of the day shows, Air India has the highest numbers of employees per aircraft. No reputed airline in the world has such a high ratio. What is the reason for overstaffing at Air India? One reason that is cited for the high number of employees at the national carrier is that it tends to hire staff to please political bosses. In other words, the hiring has little to do with operational requirements and competence but just political connections. This is certainly not acceptable because taxpayers' money is being pumped into this ailing carrier.

Do you think the government was right in bailing out Air India? If not, then raise your voice and participate in our Ban Bailouts campaign. Remember every vote counts.

Data source: Business Today

Imagine that you go on an eating binge for a few days and put on a good amount of weight as a result. Now in order to come back to your original weight, going on a diet for some days makes perfect sense, isn't it? However, a few leaders in the troubled Euro zone want to turn this logic right on its head. In order to bring their economies back on track, their solution is something similar to stuffing more food down the throat of a person who in reality wants to lose weight. In other words, they want to solve the problem of excessive debt by taking on more debt. Needless to say, the approach hasn't worked so far. CNN Money reports how the six big spenders in Europe shelled out a total of US$ 450 billion a year, all in the form of deficits, for three years and still their economies shrank.

Clearly, their Governments were hoping to fill up the void left behind by shrinking private sector spending. But the move seems to have backfired massively. They should have known that higher Government spending does not lead to prosperity. On the contrary, it has a negative long term effect on GDP growth. This is because Government is not the most efficient allocator of capital and therefore, the more it takes away savings from the private sector, the worse it suffers. Hence the best way to make an economy grow is to leave the private sector as much alone as possible. But alas, the Euro zone nations will have to pay a heavy price to learn this harsh reality.

A further cut in interest rates may be on the horizon according to the Reserve Bank of India (RBI) deputy governor Subir Gokarn. GDP Growth for the fourth quarter of F12 came in at a dismal 5.3%, and for the full year at 6.5%, well below expectations. Thus a cut in interest rates could help stimulate investments in the country somewhat. Plus oil prices have come off on account of the ongoing Euro debt crisis. At US$ 85 a barrel, crude oil has fallen to an eight month low. But, with rupee depreciation over the past year, the fall in crude prices hasn't helped India's import bill very much. Either way, India's core inflation levels seem to be easing and were still below 5% in April 2012. Wholesale Price Index inflation rose to 7.23%, higher than estimates. A good monsoon could however help keep prices at benign levels. But, even if the central bank cuts rates, it may not solve bigger structural problems. Land acquisitions, policy paralysis, coal linkages, etc. are still major issues which promoters are grappling with.

Banks and financial institutions are currently not in the pink of health anywhere in the world. Not in India either! The banking sector here may be devoid of systemic risks. But higher non-performing assets (NPAs) and lower margins have certainly impacted even the most robust entities. Notwithstanding this, global banks are making a beeline for RBI's branch licenses. After all, growth rates of smaller Indian companies are still amongst the highest in emerging markets. Also, India's increasingly wealthy middle class is drawing a lot of attention. What is more, the Indian affluent are the most active investors. This is very unlike their counterparts in the West. As per Standard Chartered Bank, on an average, they invest in 4.3 product types. However their investment choices reflect a preference for tangible options. The preferred ones are gold, high-interest savings schemes and real estate. Also wealth is gradually shifting from metros to smaller towns and cities. So, financial inclusion makes the prospects for demand growth in investment options brighter. Hence, there will be many wanting a share of the Indian investor pie. It is a matter of how well and ethically they service their clients.

The year 2008 was marked with one of the worst financial crises that hit the world economy. The series of events triggered by the collapse of financial behemoth Lehmann Brothers was disastrous. The face of the world had changed forever. Widespread panic sent investor sentiment to its all time low. The years 2009 and 2010 saw the world clawing its way out of this crisis. But come 2012, things have gone bad again. As stated by the head of World Bank, the world is headed for a catastrophe. We are going to see a rerun of the panic of 2008. The reason this time would be the exit of Greece from the Euro zone and the economic meltdown in Spain. In his opinion, the combination of these two would trigger another series of events similar to that seen in 2008. And this would send investor sentiment plummeting to another all time low. The government bailouts and quick fixes may have applied a band aid to the gaping wounds in the global economy. But this temporary relief is about to run out soon. When this happens, investors will flock to the safe haven assets. But the question this time is which asset is truly safe? Would it be time for gold to shine again?

In the meanwhile, the Indian equity markets shed some gains but were still trading firm today. At the time of writing, BSE Sensex was up by 90 points (0.6%). Most of the sectoral indices were trading in the green. Asian stock markets as well as Europe too displayed positive investor sentiments.

04:44  Today's investing mantra
"Investors have to remember: corporate profits are going up, but stocks are going up faster. How can that continue indefinitely? Investors can only earn what companies themselves can earn; the government or the markets themselves don't kick anything in. How can you get anything more out of a farm than what it grows?" - Warren Buffett

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    7 Responses to "India's growth could be much lower than reported!"


    Jun 6, 2012

    In India "sab chalta hai" attitude drives most of the government departments. What else would you expect, if there is zero Accountability and no Responsibility? All the babus are ever ready to exercise Authority, to feather their own personal nests.
    For the errors committed in numbers, the Chief Statistician should have been sent home long back and over a dozen babus prematurely retired. Nothing would change otherwise. Wishful Thinking??



    Jun 6, 2012

    It is certainly not by fault but by design.
    china has mastered the art of fudging govt. numbers and manipulating currency valuation, as its TUBELITE cousin, Indian govt are also trying to show the world that India is growing viz a viz dragon country. Raja-Telcom and Raju -Satyam has already shown their skills.
    one day Chinese bubble will burst and we will hardly get time to recollect our numbers before getting swept.
    Mr PM should realize they can win 2014 election by doing so but won't be able to steer country out of troubled water for next five years.

    Like (1)

    R Panigrahi

    Jun 6, 2012

    I agree we are in a very dismal condition and dream of being so called " SUPER POWER" in coming years may be lost in horizon.We must all of agree that no politician think/work for the country rather they are serious of roasting the national wealth and feed themselves for generation.But there are few good ones but can't do anything as their nos are neglisible.It is high time we raise to the occasion and find out the solution to save the country otherwise the future generation will have darker future even beyond imagination.

    Good luck
    R Panigrahi

    Like (1)


    Jun 6, 2012

    The truth is that Government has lost control over economy and it does not know what to do and how to go about. We may experience a Greek like situation, I request readers of this comment to prepare for such situation. The opposition and the coalition parties are after pulling down the Government rather than looking after national interest. It is a very difficult situation, lack of team spirit. We cannot blame, only the ruling party.

    Like (1)

    Gopinathan k

    Jun 5, 2012

    Yes,India's growth could be much lower than reported.As pointed out by you,different departments of the Government
    give different stastical data.This is true of so many other
    data like inflation, IIP data,exports and imports.What to say of the banks and insurance companies?.You may note that
    the different life insurance companies like SBI life,HDFC,
    LIC,BAJAJ ALLIANCE etc make a profit where the investors
    or clients are loosers having taken their policies.

    Like (1)

    R V Iyengar

    Jun 5, 2012

    It is scaring to note that actual figures of GDP could be much lower than what has been dished out by the Government.
    The Parliament should be debating such questions and keep the Government on it's toes. Unfortunately what is debated extensively is non issues like corruption in IPL, cartoons in a school book, disparaging statement about MPs by Team Anna members, whether Railway Minister should be sacked for being pragmatic, and the like.The important issues like the finance bill etc are glossed over without any debates.
    If such is the priority of our elected members. you can expect very little in terms of being a watchdog on Government performance.

    Like (1)


    Jun 5, 2012

    So what's new? Anything even remotely connected to our government (not just central govt, but all state and local govts as well) is a BIG JOKE! Even Jairam Ramesh, the rural development minister says that about MNREGA and all such idiotic, hare-brained schemes dreamt up by politicians to garner voted in the next election. It's a myth that India is democracy. It's a kleptocracy of the highest order where the nation's wealth and its votes are all stolen in form or another.

    Like (2)
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