India's GDP growth: Real or Statistical? - Views on News from Equitymaster

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India's GDP growth: Real or Statistical?

Sep 2, 2011

The month of August 2011 saw the global financial markets in extreme chaos and panic. The main triggers for such panic were the looming slowdown in the global economy and the sovereign debt crisis in the developed economies. Indian stock markets too registered significant losses. In fact, August was the fourth month in a row when the Indian markets reported monthly losses.

How about the current state of the Indian economy? For quite some time, our economy has been battling problems such as rising interest rates, high inflation, and a slew of big ticket scams. The Reserve Bank of India (RBI) has tried, in vain, to reign over the rising inflation. The Indian central bank has raised key lending rates 11 times since March 2010. But that has only arrested economic growth. And the evidence is beginning to show clearly.

According to the recently released data, India's gross domestic product (GDP) growth during the April- June 2011 quarter registered 7.7% (year-on-year) YoY growth. The same had grown by 8.8% YoY during the corresponding April-June quarter of 2010.

One may argue that a growth of 7.7% may not be so bad after all, especially at a time when the global economy is going through a very severe economic and debt crisis. But there are good reasons that hint that the '7.7% growth' figure may be illusory, and that the real numbers could actually be much worse.

Some brokerage houses have pointed out that during the June quarter there was a change in the way the industrial production data is calculated. The base year used for calculation was reset and the basket of goods included in the government's estimates was updated. As a result of such data revision, the GDP growth rate doesn't seem as bad. At the same time, the government has not updated the previous quarters' figures to reflect these changes. Hence, there are fair chances that India's economy could have, in reality, decelerated much more sharply than what the figures indicate. It would be, therefore, wise for investors to view the GDP data in the light of these facts.

We believe that the negative effects of high inflation and high interest rates are beginning to show their impact on economic growth. With inflation still remaining unabated, we could witness some more hikes in interest rates by our central bank. All in all, there are some tough times ahead for India Inc.

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