India’s surprisingly strong economic growth last quarter was likely exaggerated by statistical factors, economists said, and will push up full-year forecasts even as higher US tariffs take a toll.
Data last week showed the economy expanded 7.8% in the April-June quarter — the most in over a year and way above the 6.7% median forecast in a Bloomberg survey of economists.
While growth was stronger than expected, a lower deflator — used to strip out inflation from economic output — may have boosted the headline figure, economists from Goldman Sachs Group Inc, HSBC Holdings Plc, and Nomura Holdings Inc wrote in their reports.
The reading assumes significance as the market is closely watching for signs of the economy’s ability to absorb the coming pressure from the 50% US tariffs that kicked in last week.
The stock market, however, cheered the economy’s first quarter performance with the benchmark Nifty index gaining as much as 0.8% in Mumbai trading on Monday.
“The headline number may somewhat overstate actual underlying growth given distortions from an unusually low deflator, which is being partly driven by highly volatile food items,” said Goldman Sachs economists led by Santanu Sengupta in a note. They said the GDP numbers could have been 50 basis points lower if a correct deflator was used.
HSBC’s Pranjul Bhandari estimated the “deflator-led exaggeration” could have been as much as a percentage point. She expects the issue to likely continue for the next two quarters and lead to “some divergence between official GDP data, and high-frequency indicators.”
India uses a GDP deflator that is closely aligned with the wholesale price index, while the Reserve Bank of India targets the consumer price index as its main inflation gauge. With WPI turning negative since May, the lower deflator would have artificially boosted growth.
The composition of the GDP price deflator varies from country to country. For example, in an export-driven economy, GDP deflator gets impacted by changes in the prices of outbound shipments, which an inflation gauge like CPI cannot fully capture.
The GDP data “is not a signal of strong underlying demand,” as it was boosted by low deflators and early shipments of goods to the US, wrote Nomura economists Sonal Varma and Aurodeep Nandi in a note after the GDP numbers. They have “statistically” raised their India growth forecast to 6.6% from 6% earlier for the fiscal year. Goldman Sachs economists have raised their estimate 6.7% from 6.1%.
The growth forecast also factors in the potential hit from the doubling of US tariffs. While Goldman Sachs expects the levies to dissipate by year-end as negotiations progress, the overall impact could still shave an annualized 0.9 percentage points off GDP, translating into an additional drag of about 20 basis points on real growth for the rest of the year.
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