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Take this GDP Growth Data With a Pinch of Salt

Dec 1, 2015

In this issue:
» Does selling by foreign investors bother you?
» Monetary policy rates : An update
» Market roundup
» ...and more!
0:00
Richa Agarwal, Research analyst

The GDP growth data for the quarter ended September 2015 is out now. At 7.4% YoY growth, India has surpassed growth in China, which grew by 6.9%. On a sequential basis also, we seem to be doing well.

But here is a little perspective.

Sequentially, the second quarter is better than the first. This has been the trend in the past. So sequential growth could be due more to seasonality than an improvement in fundamentals. Moreover, growth momentum has slowed. In 2QFY15, the growth was 8.4%.

Comparisons to China makes little sense. After all, China's economy is five times India's. Even if we grow at double digits, it will take years to come anywhere close to China.

One must also note that only this year the formula to calculate GDP was changed. The numbers were reworked. Not only the base, but the way to calculate GDP was changed. On the basis of that revision, the statisticians revised growth in FY14 from 4.7% to around 6.6%. Such was the quantum of jump, just on the basis of formula. And it was frowned upon by many, including Mr Rajan.

In short, the GDP number could be a precarious growth measurement.

If ground realities are taken into account, the scepticism only deepens.

The obvious indicators paint a different picture. Monsoons have been successively below normal. The quarterly corporate performance has been disappointing. Exports have slowed. Rural demand remains slack. Real estate is in doldrums. Bank lending has contracted. Bad loans are only piling up.

With stalled projects increasing and capacity under utilisation becoming a norm, the growth in the manufacturing sector at 9.3% is most puzzling.

On a broader level, little seems to be improving, except for the statistics...and taxes. In the second quarter, the indirect tax collection is up 36%, supported by higher excise on fuel and a higher service tax. The young population is still struggling for jobs. Private sector participation in growth and infrastructure creation is limited. Business confidence index has taken a beating.

If such statistics are the base of rating ourselves and the benchmark for framing policies, one has reason to be concerned. As reported GDP goes up, fiscal deficit as a percentage of GDP is likely to look benign and may give a false sense of security.

In short, such data does not seem to be capturing the real state of the economy and must be taken with a pinch of salt.

We have always insisted on following a bottom up approach up to investing. While markets are influenced by GDP data and interest rates, these are short-term indicators, and they are of no consequence to stock specific fundamentals. Investors would do well not to make investing decisions based on GDP and interest rates; rather, they should focus on the real triggers for the businesses they invest in.

Do macro data like GDP growth and RBI policy rates influence your investing decisions? Let us know your comments or share your views in the Equitymaster Club.

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2:00 Chart of the day

In 'The Honest Truth', Ajit Dayal, Director at Quantum Advisors and Quantum AMC, recently stated the challenges facing the retail investor in India. We came across an interesting article in Livemint that highlighted the influence FPIs (Foreign Portfolio Investors) have over retail investors.

As today's chart shows, FPIs clearly have more influence on stock prices compared to DIIs. Using Tata Motors and Hindalco as examples, we can see that stocks that FPIs dump tend to fall despite the buying by DIIs. Apart from the absolute number of shares bought or sold, speed is also an explanation. FPIs react to news faster than anyone else in the markets. DIIs on the other hand tend to act more slowly.

But there's another reason as well. They need to react to redemption pressure from their respective countries. Foreign investors may sell due to a variety of reasons. Many of those reasons are completely disconnected from fundamentals.

This only reinforces our view that Indian retail investors should not blindly follow FPIs in and out of stocks. It is far better to take advantage of the volatility caused by their selling to enter good quality stocks for the long-term.

FPI selling v/s DII buying impact
4:15

As expected, the RBI has kept all key policy rates unchanged. Governor Rajan stressed that the central bank was not against economic growth. Rather it is in favour of sustainable growth. Also, it is working with the government to achieve it.

Sustainable growth certainly involves keeping inflation in check. This the RBI has done well we believe. The governor stated that while the monetary policy stance will remain accommodative, it would also keep the economy well anchored on a path of lower inflation. To help achieve this, the RBI will more actively track commodity prices from now on.

It is important to note that the RBI does not believe that inflation is dead. In fact, the governor flagged non-food, non-fuel inflation (the so-called core inflation) as a concern. He stated that due to inadequate supply, the economy was hurting from high inflation in the services sector.

It was also interesting to hear the governor express hope that PSU banks would clean up their balance sheets by March 2017. He said the RBI was in the process of changing the governance structure of banks. While this is encouraging, we are not so hopeful on this front as the task ahead of PSU banks is herculean as far as NPAs are concerned. But it is indeed heartening to see that central bank is taking a realistic view , something that even the macro data like GDP growth rate seems to be failing to capture. All in all, we believe it was a well-balanced and well-articulated policy along expected lines.

4:30

At the time of writing, Indian Indices were trading on a positive note. Sectoral indices were trading on a mixed note with stocks from the metal and energy sectors leading the gains. Telecom stocks were however trading in the red.

The BSE-Sensex was trading up 29 points (up 0.1%) and the NSE-Nifty was trading up 14 points (up 0.2%). The BSE Mid Cap index was trading up 0.4% while the BSE Small Cap index was trading up by 0.3%.

4:45 Today's Investing mantra

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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2 Responses to "Take this GDP Growth Data With a Pinch of Salt"

T.M.RAMANI

Dec 4, 2015

I am a mathematician and statistician. In my opinion there are two types of lies. One is true lie and the other is statistics. You can bend statistics according to your needs. So GDP data is nothing. Tomorrow I can alter it to beat China and all the countries put together.

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AB Pereira

Dec 1, 2015

I tend to fully agree with you, as always, on the economy front. The same dispensation that created much ado about nothing of some so called models with fake numbers to come to power, is today playing with the economic numbers. Their previous avatar in 2003 tried doing the same with 'India shining' mantra when actually the shining was a mirage of a country that was burning with issues. Even today, the situation is same, they are desperately trying everything but are getting badly exposed - look at the high prices of grains, but they say inflation in check, look at the INR exchange rate and they say economy is growing, no fear of US raising interest rate etc. They have been increasing duty on fuel and denying the benefit of reduced global oil prices to the consumers, and have increased service tax too.
Sadly, very few people understand these gimmicks of our politicians, so they continue fooling the public. How long? till the affected people have the virtue of patience. Only time will tell.

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