Wednesday, December 2, 2015

Is the Modi Government patting itself falsely?

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 statisticiansrevised 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. 

The above is from the newsletter I receive from Equitymaster and has been written by Richa Agarwal, A Research Analyst.

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