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Government Should Reconsider its GDP Numbers...
Fri, 12 Feb Pre-Open

Let's talk about GDP today. If one has to trace the recent developments in this space, there could be found a lot of optimism. The recently released GDP numbers by the government have surely made it clear that India is going to grow at an acceptable pace. However, what if this is a fa├žade behind which the reality has been grounded? There can be a possibility for the doubt. And if the counter-arguments are understood, they all concur that the revised GDP numbers are unrealistic.

The (Un)told Story

The GDP estimates for the third quarter of 2015-16 were released on 8 February. As per the estimates the growth in GDP during 2015-16 is estimated at 7.6% as compared to the growth rate of 7.2% in 2014-15.

The number is difficult to believe. A growth of 7.6% would imply that the growth in the quarter ended March 2016 should be 7.8% YoY. This would be much higher than the growth of 7.3% in the third quarter, which happens to be the festive season. Also, what makes the target even more enquiring is that at this rate, India will be the fastest growing economy in the world, surpassing even China. Further, if the economy is to grow at 7.6%, it would be recorded as the highest in five years.

All of these presumes that the growth in India has picked up. But if one has to look, matters on the ground level are still shaky. The story that the government has presented by these GDP estimates should be taken with a pinch of salt. Even if the there are some positive developments, it would be wrong to believe that the story at face value.

While we have our reservations about this new GDP, even if we were to take it at the face value, there are reasons to be concerned.

Some Questions and Comparisons...

Going by the supply side breakup, only manufacturing sector has shown some signs of recovery vis-a-vis last year. All other sectors reflect a deceleration. And if one is wowed by the impressive growth in manufacturing sector, there are questions regarding the same too. This is because private investments have slowed. This is in contrary to the impressive uptick in manufacturing sector.

As an article in Livemint states, the decline in investment growth to 5.6% in real terms from 6% in 2014-15 is puzzling against the robust jump in manufacturing, where much of the investment typically takes place. One of the recent articles from Vivek Kaul's Diary has also argued why the manufacturing sector cannot grow at 9.5% during this year. You can read it here.

On the demand side too, government spending has slowed. Further, while the consumer spending has strengthened to 7.6% over last year's 6.2%, the rural component is still feeling the effect of two adverse monsoons in a row.

And there are many more concerns. The quarterly corporate performance has been disappointing. Exports have slowed. Rural demand remains slack. Real estate is in doldrums. Provisioning of bad loans at banks have piled up.

Long Story Short

It is difficult to believe the economic growth data put out by the government. With that one should also keep in mind that paying too much heed to the GDP numbers to assess India's economic health and prospects is not a good idea.

As for investors, we have always insisted on following a bottom up approach up to investing. While markets maybe be influenced by GDP numbers, they are short-term indicators, and they are of very little consequence to stock specific fundamentals. Investors would do well not to make investing decisions based on these parameters. Rather, they should focus on the real drivers of the businesses they are investing in.

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Mar 21, 2018 12:39 PM