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Getting back to 'Hindu' growth
Surjit S Bhalla
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March 04, 2009
Emboldened by the lack of any questioning by the experts (including those in government, the media, this newspaper!) of my conclusion that there was a Rs 112,000 crore gap in government expenditures and reality, I hereby offer another seemingly off the wall conclusion GDP growth in 2008/09, for which firm data are available for nine months, and indirect evidence for 11 months, is likely to be significantly below 5 per cent, and closer to 4 per cent. Yes, no typos here.

Yes, I realise that the CSO just two weeks ago, having considerably more data than the rest of us, came out with a forecast of 7.1 per cent. Yes, I am aware that the Congress government, steeped in its own cluelessness, just came out with a Budget stating that the economy did not need any additional stimulus because we had provided so much already.

Yes, I am aware that the gatekeeper of the Indian economy, the Reserve Bank of India [Get Quote], just announced a fortnight ago that it was mightily pleased that analysts were crediting it with the stimulus of the fastest rate cuts in the world.

Yes, I am also aware that all the experts at the investment banks (and the media via a laudatory and tendentious New York Times article as to how RBI had saved India from a crisis look the growth rate is 7.1 per cent so what are you complaining about) are claiming that GDP growth for 2008/09 will come in at around 6.5 per cent.

For the next year, they boldly forecast a lower growth rate of around 5 per cent. I want to believe the experts. And maybe they will be right. But only because GDP growth next year is likely to be higher than 2008/09! (There is an equal misguided error in the forecasts of government expenditures for 2009-10, especially large subsidy expenditures in food, oil and fertiliser, but that I will deal with in a subsequent article).

There are several ways of forecasting GDP growth rates, especially when more than three-fourths of the data are available. So to get it wrong, and massively wrong as I am suggesting, is to make an inexcusable albeit misguided mistake.

Tragically, led by the front by our economic decision makers in RBI and ministry of finance, the government has been more than casual and clueless about the real happenings in the economy. They have been in complete denial, wishing to concentrate on the spin needed for the next election. Mai Hoon Na is now the war cry of the Congress as it falters from one mistake to another.

There are several methods of forecasting GDP growth rates based on more than nine months data. First a bottoms up sectoral approach. Let us start with agriculture, a sector which showed a 2.2 per cent decline for the last 12 months.

A point made often in the past, but one which bears repeating despite it repeatedly failing to pierce the deaf ears of experts at investment banks and the media (and the policy makers!), is that a 12-month growth rate in October-December 2008 includes growth that took place from January to March 2008, a quarter that does not belong in the calculation for the fiscal year that starts in April 2008.

So what is an analyst to do? She can take the nine-month growth rate from April to December and approximate growth for the quarter just ending. Simple, no? Not at all. This calculation would show horrendously high growth rates in agriculture of around 20 per cent plus.

This occurs because of seasonality in agricultural production. The response to this problem has been to use year-on-year growth rates, but as shown above, such a calculation includes growth that does not belong.

The accepted solution to this problem is to use seasonal adjustments. Since RBI staff have written papers on this, the problem and solution is well known to them. Why they dont use it in policy formulation, or why their umpteen advisers dont tell them to do so is one of the enduring mysteries about governance failures within the government.

Seasonally adjusted and annualised (one quarter growth rate multiplied by four) growth rates (SAA) are presented in the table for the different sectors of the economy. Agriculture (17 per cent of GDP) has declined 0.5 per cent. That agricultural growth is unlikely to exceed 1 per cent for the full year is also indicated by the pattern of the monsoon, which was 2 per cent below normal.

This pattern is associated with an average of 1 per cent growth for the last 30 years. Industrial growth for the past nine months has been only 1 per cent, SAA. These two sectors (construction is within industry) account for 44 per cent of the economy, and this 44 per cent has grown, to date, at 0.2 per cent. Services growth, to date, has averaged 7.7 per cent, a steep decline from last year growth of 11.2 per cent.

While the government, and market, looks at the year-on-year data for GDP growth of 6.8 per cent, in reality the economy has been growing at only a 4.5 per cent pace (GDP factor cost data).

According to GDP at market prices, the growth rate has been 1 percentage point lower, only 3.5 per cent, with the growth rate in the October-December quarter at a negative 1 per cent, SAA. All in all, this suggests that the full-year GDP growth rate will be between 4 and 5 per cent.

The problem of looking at year-on-year growth rates when reality is quarter-on-quarter SAA is not unique to India. Recall that the Chinese year-on-year growth rate decelerated to 6.8 per cent in the October-December quarter, a considerable slowdown from the double digit growth in the first nine months of the year.

Everybody quickly realised that this meant zero growth to a decline for the October-December quarter. Both monetary and fiscal authorities in China reacted much faster than their Indian counterparts. They were not in denial, and knew that ultimately they were accountable to the population.

In India, the Central government has some excuse, but not really, for being in denial and seemingly clueless. (How much in denial is indicated by the fact that they havent even bothered to appoint a full time Finance Minister, this at the greatest economic crisis the country has faced).

It is for certain that RBI cannot hide behind any fig leaf. It needs to be made accountable for its wrong (and good) decisions. That is when it can be worthy of being called the last institution standing.

The author is a fund manager and anchor of Tough Talk on NDTV Profit.

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