Although changes in the methodology to calculate Gross Domestic Data has thrown up fantastic advanced estimates, Jahangir Aziz, chief economist at JP Morgan says nominal GDP has not moved much. For framing policies, including Budget, the government uses nominal GDP data while the RBI uses CPI data for framing monetary policy.
Most economists are foxed by the FY15 GDP projection of 7.4 percent compared to 6.9 percent in the previous year arguing indicators on the ground like auto sales, corporate earnings etc suggest something else.
While analysing the CSO estimates, Aziz says that after seasonally adjusting the quarterly data, India could have grown at an annualised rate of 13 percent till the previous quarter. In order to make it to the projected 7.4 percent, India has to grow at 8 percent in the current quarter. "Those are very difficult numbers to reconcile," he says.
Below is the transcript of Jahangir Aziz’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: This is looking extremely puzzling, how did you marry the 7.5 percent growth which the Central Statistical Office (CSO) put out with the actual data that we are getting, corporate earnings dismal numbers from Larsen and Toubro (L&T), from Tata Steel, dismal number across the board, auto sales not picking up, two wheeler sales after showing some growth in December falling to 2 percent in January; where is this growth that the CSO is finding? A: The sure answer to your question is that we didn’t even try to marry it with the high frequency data. I think it is fully acknowledged now that the high frequency data is showing a direction which is very difficult to figure out from the numbers that CSO has come out. I think more than the 7.5 percent growth rate per se, what it has done is to throw in a spanner in the works on what the position of India is in a cyclical sense. We do not have what the growth rate would look like if we used the same methodology previously. It is very hard to say what the cyclical position is. More importantly if you look at the quarterly data and do a seasonal adjustment of it, and I know that the CSO does not give out its own seasonal adjustment, then the seasonally adjusted India grew at 13 percent annualised rate in Q3 calendar. That growth rate fell to 3 percent in Q4 of calendar and so to make 7.4 percent India has to grow at 8 percent in the Q1 of this year which is this current quarter and those are very difficult numbers to reconcile with any of the higher frequency data including the ones that you talked about in the beginning.
Latha: As economist do you just ignore this data? This will have to form the basis of all your analysis, how will you reconcile them? A: It is a very tough job trying to reconcile them. As you pointed out, the nominal GDP growth hasn’t moved very much but even there if we look at we were expecting based on let us say 5-5.5 percent real GDP growth rate, a very large terms of trade shock. On top of that inflation is falling very sharpl. We were looking at a sub 10 nominal GDP growth. So, even on the nominal GDP front even though it is not very different from what was in the Budget, it is still very different from what we had expected. So, my own sense is that the methodological changes are very good, moving from 2500 firms in your survey to produce national GDP to 500,000 firms is commendable. I think the problem is with the deflation that has been done, a significant portion. I think that the reclassification of many of the things that were considered to be services, trade related are back to manufacturing again.it is not very clear as to what exactly was done. So, in terms of answering your question what is the reconciliation we are doing, at this point in time we are keeping the two of them separately. We are focusing more on the high frequency data. We are expecting the Reserve Bank of India (RBI) will do the same and that the way in which we are looking at monetary policy or even the Budget coming out two weeks down the road I think they are going to focus more on the high frequency data and what that implies rather than these numbers.
Latha: The real GDP number is not used for any policy making. The Budget uses the nominal GDP and that has not been changed and the RBI uses the consumer price index (CPI) data which hopefully will not be changed so what are you expecting from the CPI numbers itself, they will not make life difficult? A: The CPI numbers could make life difficult if you follow the global pattern. So, if you look at the way in which every CPI number that has come across the world in January, it has always surprised consensus on the downside and by significant margins. One of the reasons I think that is happening is because the overall effect of oil price and commodity price decline is clearly significantly larger than what is there in CPI basket, etc. So, I think that we are being surprised by the overall impact that oil prices and commodity prices have, add to that manufacturing disinflation that is happening across the globe. I think more or less we could also be surprised on the downside by the inflation prints. Now, that makes life difficult for RBI because the RBI needs to figure out what is going to happen in 2016 rather than what is going to happen in the next few months and therefore the pressure on the RBI to start reducing rates will become more intense because real rates will go up. Add to that the fact that the real exchange rate appreciation has also been very significant in these last six months given the massive appreciation against the yen and the euro.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
