Moneycontrol Pro Panorama | India's economy may be flying higher than what the altimeter shows

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It looks like a duck, quacks like a duck and swims like a duck… but hey, it might be a swan after all!

Neelkanth Mishra and his team at Credit Suisse think that the Central Statistics Office is underestimating GDP.  They believe that the underlying growth is stronger than what official GDP estimates indicate, and that in FY24, real GDP growth will be stronger than the current consensus forecast of 6 percent. Why?

One, they point to the 3-year compounded annual growth rate (CAGR) in volumes of many indicators which outstrip real GDP growth. The September quarter FY23 vs. the same quarter in FY20’s GDP CAGR is 2 percent. However, electricity, cement, petrol consumption, IT Services, rail freight, four-wheeler sales and e-way bills volumes are all higher.

They admit that the limitations of these indicators is that they don’t track the informal sector, but say that consumption of dense energy, which typically tends to lag GDP growth, is growing at 7 percent CAGR. That indicates stronger GDP growth, they argue.

Two, they believe that consumption among the low income strata will improve.

“While granular data to study this was not available in India, the pattern is unlikely to be different from that observed in the US, where much of the increase in savings for the top quartile of households was due to reduced outlays, i.e., foregone consumption. As their spending has recovered, so have the incomes for the poorer households,” they write.

Three, government spending is picking up. “Collecting taxes and borrowing from the market and not spending had the effect of a coiled spring, which recent fiscal data shows is now releasing growth momentum,” they write.

What's likely to play spoilsport?

Growing headwinds to global growth, the rise in cost of funds and the unwinding of supply chains that's pressuring exports. These factors, plus a fall in risk appetite, will squeeze capital inflows.

"Closing the BoP deficit would mean slowing the economy down through a mixture of: (1) a weaker currency; (2) higher interest rates than warranted by the Taylor Rule (which focusses only on inflation and growth); (3) a moderation of the fiscal deficit and (4) attracting dollar flows. Of these, the latter may not be easy in the current environment. Each of the first three is likely to slow the economy down in the near term," they add.

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Ravi KrishnanMoneycontrol Pro