Friday, April 17, 2015

India's New GDP Figures: Modi Takes BS Seriously!

"The estimated “evacuation (defecation) rates” are 0.3 kilograms per day for goats and 0.8 kilograms per day for sheep. The study, titled “Positive Environmental Externalities of Livestock in Mixed Farming Systems of India,” was conducted jointly by the Central Institute for Research on Goats, in Makhdoom, Uttar Pradesh, and the National Center for Agricultural Economics and Policy Research in New Delhi. With all those “droplets” added in, the value of India’s livestock sector in the new GDP series is 9.1 billion rupees, or $150 million, higher than it was in the old series."  Wall Street Journal on India's GDP Revisions
Animal droppings (BS) is just one of many innovations of Central Statistical Office (CSO) that are being used to support India's claim to be growing faster than China. Until early February, when CSO changed the way it measures economic activity, India was enduring its weakest run of growth since the mid-1980s. Now it is outpacing China, having grown an annual 7.5% in the fourth quarter of last year, reports Business Standard.

Indian Livestock GDP Calculations. EOG=Edible Offals, Glands. Source: CSO Via WSJ

While India's boosters in the West are not only buying but applauding the new figures, Indian policy professionals at the nation's Central Bank and the Finance ministry are having a very hard time believing the new and improved GDP brought to the world by Indian government. Dissenters include Morgan Stanley's Ruchir Sharma, an Indian-American, who has called the new numbers a "bad joke" aimed at a "wholesale rewriting of history".

Based on the latest methodology,  it is claimed that the Indian economy expanded 7.5 percent year-on-year during the last quarter, higher than 7.3 percent growth recorded by China in the latest quarter, making it the fastest growing major economy in the world, according to Reuters. Is it wishful thinking to make Indian economy look better than China's?

India GDP Revisions. Source: Financial Times

The GDP revisions have surprised most of the nation's economists and raised serious questions about the credibility of government figures released after rebasing the GDP calculations to year 2011-12 from 2004-5. So what is wrong with these figures? Let's try and answer the following questions:

1. How is it possible that the accelerated GDP growth in 2013-14 occurred while the Indian central bankers were significantly jacking up interest rates by several percentage points and cutting money supply in the Indian economy?

2. Why are the revisions at odds with other important indicators such as lower industrial production and trade and tax collection figures?  For the previous fiscal year, the government’s index of industrial production showed manufacturing activity slowing by 0.8%. Exports in December shrank 3.8% in dollar terms from a year earlier.

3. How can growth accelerate amid financial constraints depressing investment in India?  Indian companies are burdened with debt and banks are reluctant to lend.

4. Why has the total GDP for 2013-14 shrunk by about Rs. 100 billion in spite of upward revision in economic growth rate? Why is India's GDP at $1.8 trillion, well short of the oft-repeated $2 trillion mark?

Questions about the veracity of India's economic data are not new. US GAO study has found that India's official figures on IT exports to the United States have been exaggerated by as much as 20 times.

Similarly, French economist Thomas Piketty has argued in his best seller "Capital in the Twenty-First Century that the GDP growth rates of India and China are exaggerated.  Picketty writes as follows:

"Note, too, that the very high official growth figures for developing countries (especially India and China) over the past few decades are based almost exclusively on production statistics. If one tries to measure income growth by using household survey data, it is often quite difficult to identify the reported rates of macroeconomic growth: Indian and Chinese incomes are certainly increasing rapidly, but not as rapidly as one would infer from official growth statistics. This paradox-sometimes referred to as the "black hole" of growth-is obviously problematic. It may be due to the overestimation of the growth of output (there are many bureaucratic incentives for doing so), or perhaps the underestimation of income growth (household have their own flaws)), or most likely both. In particular, the missing income may be explained by the possibility that a disproportionate share of the growth in output has gone to the most highly remunerated individuals, whose incomes are not always captured in the tax data." "In the case of India, it is possible to estimate (using tax return data) that the increase in the upper centile's share of national income explains between one-quarter and one-third of the "black hole" of growth between 1990 and 2000. "

T.C.A. Anant, the chief statistician of India, has told the Wall Street Journal that “there’s a large number of areas where we have deviated (from the United Nations’ latest guidebook on measuring GDP) for a large measure, because we are simply, at the moment, unable to implement those recommendations.”

Related Links:

Haq's Musings

Is India Fudging GDP to Look Better Than China?

India's IT Exports Highly Exaggerated

India-Pakistan Economic Comparison 2014

Pakistan's Official GDP Figures Ignore Fast Growing Sectors

Challenging Haqqani's Op Ed: "Pakistan's Elusive Quest For Parity"

State Bank Says Pakistan's Official GDP Under-estimated

Pakistan's Growing Middle Class

Pakistan's GDP Grossly Under-estimated; Shares Highly Undervalued

Fast Moving Consumer Goods Sector in Pakistan

3G-4G Roll-out in Pakistan


Riaz Haq said...

Former central bank governor Dr Y V Reddy once quipped to me that while the future is always uncertain, in India even the past is uncertain, given how often the government revises economic data. Even by that standard, however, the dramatic upward revision of the GDP growth rate is a bad joke, smashing India’s credibility and making its statistics bureau a laughing stock in global financial circles.
The new and not-so-funny numbers show that the Indian economy grew at a pace of 6.9% in the last fiscal year, a claim that is fantastic in the extreme. Many Indian economists have set out to show that the new growth numbers for the economy as a whole simply don’t add up, as a sum of the parts. Every piece of data — from the tepid increase in corporate revenues to imports, credit, rail freight and auto sales — points to a much lower growth figure, probably closer to the old estimate of 5%.
Surprisingly, for a country obsessed with its GDP growth rate, there is not much outrage at this travesty, either in public or at cocktail parties. In the past, India’s habit of revising economic data was confined to relatively minor tweaks, but this latest update is a wholesale rewriting of history. In the international financial community, no one had questioned the veracity of India’s economic numbers, until now.
This makes India look bad even compared to China, which many analysts have long suspected of massaging GDP figures to show steady growth. But the same sceptical analysts admit that when China manipulates its numbers, it does so carefully and only when the actual growth rate falls below its official target, as it has of late. The authorities seem to know exactly what they are doing. India’s new GDP data clashes even with the pronouncements of some government and central bank officials, suggesting that the left arm doesn’t seem to know what the right arm is doing.
The whole episode is reinforcing the bad rap India gets for poor governance standards. To be sure, many emerging nations including Turkey and Nigeria have issued flattering upward revisions of their growth data in recent years, but generally without eliciting peals of laughter. Last year, Nigeria issued a revision showing that the economy was nearly twice as large as previously reported, but it was widely accepted because the new methodology was well explained and had the endorsement of the International Monetary Fund.
The IMF in fact recommends that, every five years, countries update the base year they use to calculate the pace of growth in the economy. The idea is to capture the impact of new growing industries, and Nigeria hadn’t updated its base year since 1990. India’s last revision came in 2010, so this one came on schedule. Only the statistics bureau clearly rushed it into print, without conducting even an elementary ‘smell test’ to ensure that the new numbers square with the reality on ground. One clear sign of the bureau’s haste to publish is the fact that it released revised data for only the last two years, making it impossible to see the long-term trend for India’s growth rate.
Nobody really believes that the Indian economy grew at anywhere close to 7% last year, and shockingly no one is willing to put an end to this nonsense. When India delivers its budget on February 28, officials are likely to claim that economic growth in the coming year will accelerate to around 8% — a figure based on the new series. A forecast based on dodgy numbers will only cast doubt on India’s claim to be the world’s fastest-growing large emerging market, though that claim could easily prove true in a couple of years, based on credible numbers.

Mayraj said...

Don't get disillusioned, support Modi: Ratan Tata to India Inc

The comments come at a time when various business leaders have talked about a need for the new govt's reform measures to start reflecting on the ground

Anonymous said...

You may recall that during the days of Emperor Rajiv Gandhi he was brought figures of the reserve food stocks. He exploded at what he thought was a minimal quantity. The stats people went away, did a rope trick, and came back to him with an inflated figure. The emperor was satisfied.
Now that the Hindu Raj in India is in the process of banning cow ( i.e. cows, bulls, buffaloes - and soon to include even goats and chickens in Maharashtra)slaughter - violating a human right of being able to eat a food consumed across the globe for many millenia, THERE WILL BE EVEN MORE SHIT FOR THE SAFFRONITES TO PICK UP RIGHT ACROSS!

Shifting this thread slightly, the Union Finance Minister, Arun Jaitley has solved the problem of Hindu attacks on Christian institutions and personnel by claiming that the attacks have been carried out by non-Hindus - meaning Muslims. He entered the cabinet not by winning a Lok Sabha seat - he in fact lost - but via the back door of a Rajya Sabha nomination.

Riaz Haq said...

On popular demand, I post a graph of the difference between the GDP data and the RBI Balance of Payments (BoP) data. This is referencing my posts on how the Q4 data has been ‘fudged’ and India is likely to have seen GDP contraction (in real terms, that is, accounting for inflation). Read: Has India Plunged Into Recession? GDP Data Fudge Reveals Details and India *HAS* Seen Negative GDP Growth, BoP Confirms Data Fudge
(Click for a larger picture)
As you can see the March 2012 quarter is very strange – Exports are larger in the MOSPI figure than the BoP figure tells us, and GDP imports are much smaller than BoP data.
But there’s an important takeaway.
Exports may have been understated in GDP figures in the first three quarters of this year, by about 65,000 cr. The discrepancy in Q4 is about 87,000 cr. So the difference, for the whole year, is a manageable 22,000 cr. You might be able to explain that by saying that they’ve stuffed the corrections into the last quarter. (I don’t believe that – they keep revising earlier quarter numbers with every GDP release – so if you update the past figures, you’re not allowed the excuse that you stuff corrections into the last quarter).
But Imports remain a mystery. Even if you account for stuffing (Imports have been overstated in the GDP in the Sep and Dec quarters) the difference for the full year, between the MOSPI GDP Data and the RBI BoP, is about 120,000 cr., which is a fairly large number to miss.
The difference in imports is so large that even if you rejig for past quarter misses, it will still result in much lower GDP growth. Reworking the numbers for a (-120,000 cr.) net export figure – negative because we imported more than we exported – we still get a nominal growth number of about 4.5%. Subtracting inflation of 7% and, like we’ve talked about, a GDP contraction. Even if we eke out positive growth for the year, It’s not looking good for the last quarter.
I’ve also been told that I’m being silly for believing any of the numbers in the GDP releases, since they are largely figments of people’s imagination. While I hope that is not true, it’s not a theory that can be written off, so please use appropriate pinches of salt.

Faisal said...

Riazbhai, what is the correct figure of exports for India? They are inflating IT figures so they must be lower and then how much are the imports? I found out exports $312 billion (inflated) and imports $500 billion on paper. That is -$188 billion and then you have to adjust for inflated numbers.
So there is at least $240 billion negative every year - how does the economy survive?

Gourish said...
This comes from a newspaper who has gone so far as to portray 2 different schools in 'Modi's' Gujarat as an evidence of religious discrimination..neither you nor me is an economist..its up to you to review this article..

Riaz Haq said...

India survives on large external capital inflows in the form of investments and debts in the post-Cold War era with the West boosting India against China and Pakistan.

Indian economy would collapse without such inflows.

Read the following to get a sense of the magnitude of foreign capital inflows in India:

"Strong capital flows to India in the recent period reflect the sustained momentum in domestic
economic activity, better corporate performance, the positive investment climate, the longterm
view of India as an investment destination, and favourable liquidity conditions and
interest rates in the global market. Apart from this, the prevailing higher domestic interest
rate along with a higher and stable growth rate have created a lower risk perception, which
has attracted higher capital inflows. The large excess of capital flows over and above those required to finance the current account deficit (which is currently around 1.5% of GDP) resulted in reserve accretion of
$110.5 billion during 2007/08. India’s total foreign exchange reserves were $308.4 billion as
of 4 July 2008."

"Gross capital flows have increased nearly 22 times from $42.7 billion in 1991-92 to over $932.3 billion in 2010-11. As a share of GDP, this amounted to an increase from 15.5% in 1991-92 to 55.2% in 2010-11. Much
of the increase in financial integration occurred between 2003-04 and 2007-08. Given the
impressive economic performance indicated by close to 9% growth rate, higher domestic
interest rates and a strong currency, India's risk perception was quite low during 2003 to 2007.
Furthermore, this period was associated with favorable global conditions in the form of ample
liquidity and low interest rates in the global markets—the so-called period of Great Moderation."

jigar said...

[Faisal: "So there is at least $240 billion negative every year - how does the economy survive?"

Riaz: "India survives on large external capital inflows in the form of investments and debts in the post-Cold War era with the West boosting India against China and Pakistan.

Indian economy would collapse without such inflows"]

Are you saying that western companies are investing 240 billion in India to boost it against China and Pakistan?

I thought any investor would be looking to get a healthy return on their investment whether it is China or India. This boosting that you talk about does not make any sense.

You also cite ADB:

"Gross capital flows have increased nearly 22 times from $42.7 billion in 1991-92 to over $932.3 billion in 2010-11. As a share of GDP, this amounted to an increase from 15.5% in 1991-92 to 55.2% in 2010-11. Much
of the increase in financial integration occurred between 2003-04 and 2007-08. Given the impressive economic performance indicated by close to 9% growth rate, higher domestic interest rates and a strong currency, India's risk perception was quite low during 2003 to 2007.

Is the above data regarding GDP growth of 9% correct then or is it fudged?

Why would anyone invest in India, including locals, if the economic data is hyped? Sooner or later the house of cards will come crashing down don't you think?

Revisiting your premise.
1. Indian IT/BPO service exports of approximately $75 billion are hyped up as indicated by a GPO study that you commonly cite.
2. Indian GDP figures are inflated.
3. Indian exports, currently $315 billion, are fudged

Once again let us assume your premise is well grounded explain why then over the years, the Indian economy has come crashing down?

Quite to the contrary, the very steady foreign exchange reserves are at a record $322 billion now.

IMF/World Bank/ADB have forecast GDP growth of 7.2-7.9% in the next five years.

Several Industrial Corridors, with collaboration from Japan, UK and US, across India:
With a total investment of $500 billion.

Riaz Haq said...

JIgar: " Are you saying that western companies are investing 240 billion in India to boost it against China and Pakistan?"

Western capital flows, including private investments, are guided by US and its western allies policies toward the recipient countries.

Example: Russia and East Europe were excluded as destination of western capital during the cold war. After the end of cold war, Russia became a part of "BRIC", as did China and India.
Now Russia is back on on "bad guys" list and western capital inflows have dried up again.

Iran, a part of group of N-11, is also cut off from western capital in spite of tremendous opportunities there.

Anonymous said...

Capital inflows are essential for developing economies to grow. Have you forgotten about China? How much FDI China received in last 2 decades? Way much more than India about 10 times more I would guess. Pakistan doesnt get much FDI and how is your economy doing? So saying economy would collapse without capital inflows is the same as saying you would die if you dont eat food. So you dont score any brownie points here. Sorry!

Riaz Haq said...

Anon: "Capital inflows are essential for developing economies to grow. Have you forgotten about China?"

China's rise was driven mainly by export surpluses, not massive deficits, the kind of deficits India continues to run.

Listen to Dr. Ghosh on JNU. She says:

1. Talk of Chinindia is nonsense. China and India are two very different countries with different histories. India has never done the hard work of basic reforms that China did decades ago. Unlike India, early reforms combined with greater state control on the economy have helped China achieve rapid and massive reduction in poverty.

2. Unlike China, India does not run any trade surplus or current account surplus to fund its growth. In fact, India has been running significant twin deficits. India depends much more on foreign investments for its growth than China.

3. Although large number of Indians estimated at 110 million have been the main beneficiaries of India's rapid economic expansion, their numbers are only about 10% of India's 1.1 billion people. The growth has excluded the rest of the 90% of the population, leaving them in abject poverty.

4. Instead of fighting against economic injustice, people are being divided along ethnic, religious and caste lines. There is an increase in all kinds of unpleasant social and political forces in India, where people are turning against each other, against linguistic, caste and faith groups, because they can't hit at the system—it's too big. So they pick on somebody their own size, or preferably smaller.

jigar said...

[Western capital flows, including private investments, are guided by US and its western allies policies toward the recipient countries.]

You claim, Indian GDP and economic figures are not reliable. Exports are hyped, GDP is fudged. Wouldn't the guided policies of the West be aware of this and stop investing in India or do they allow themselves to be hoodwinked by these fake figures as you so eagerly claim?

"China's rise was driven mainly by export surpluses, not massive deficits, the kind of deficits India continues to run"

So how does India bridge these deficits year in year out? Is it the guided West who wants to save India


Will India collapse - do you have a timeline?

Riaz Haq said...

Jigar: "You claim, Indian GDP and economic figures are not reliable. Exports are hyped, GDP is fudged. Wouldn't the guided policies of the West be aware of this and stop investing in India or do they allow themselves to be hoodwinked by these fake figures as you so eagerly claim?"

I am not claiming it; I'm simply reporting what credible Indian and western economists and analysts are establishing with reliable data and cogent arguments.

And western governments and western-backed institutions believe whatever they find to be in their best overall interests and support their current strategy.

Ravi Krishna said...

"I am not claiming it; I'm simply reporting what credible Indian and western economists and analysts are establishing with reliable data and cogent arguments. And western governments and western-backed institutions believe whatever they find to be in their best overall interests and support their current strategy."

Do you think before writing or is that too much from a Paki. The first para of the above contradicts the second para. 'reputed western economist' and political analysts guide the decision makers in companies. Western companies invest in India because they are getting ROI. Hyped up GDP can not create good ROI.
No one wants to invest in Pakistan because it has nothing to offer as ROI. How hard is it for you to understand.

Keep dreaming about Indian collapsing. We enjoy this as much as we have been enjoying collapse of India for the last 68.

Riaz Haq said...

RK: " Western companies invest in India because they are getting ROI. Hyped up GDP can not create good ROI."

Western investors have lots of choices among the many markets like Pakistan that have consistently outperformed India for over a decade. The reason they choose India is because the US govt policy encourages it for strategic post-cold war reasons.

Last year was the first time in a decade that Indian market slightly outperformed Pakistan's.

It seems India and Pakistan don't only compete on the cricket and hockey fields but also on stock benchmarks. For the first time in three years, India's benchmark Sensex delivered higher returns than Pakistan's the KSE 100. The match went down to the wire, with the Sensex gaining 29.9 per cent and KSE 100 returning 27.2 per cent.

Anonymous said...

"Western investors have lots of choices among the many markets like Pakistan that have consistently outperformed India for over a decade. The reason they choose India is because the US govt policy encourages it for strategic post-cold war reasons. "

Substantiate that claim of US govt policy encouraging investment to India over Pak with evidence. Any sources, legislation or references?

Indian said...

The export surpluses didn't come out of thin air. Foreign companies came in with the capital, set up factories and did the manufacturing. If capital from foreign companies is so bad why so hyped about Xinping's announcements?

Riaz Haq said...

Indian: " The export surpluses didn't come out of thin air. Foreign companies came in with the capital, set up factories and did the manufacturing. If capital from foreign companies is so bad why so hyped about Xinping's announcements?"

So where are India's trade surpluses after more than trillion dollars in FDI? Why haven't they materialized?

Riaz Haq said...

Anon: " Substantiate that claim of US govt policy encouraging investment to India over Pak with evidence. Any sources, legislation or references?"

Here's an excerpt of the most recent statement coming out of the White House:

"The signing of a framework on and inauguration of the India-U.S. Investment Initiative in Washington on 12-15 January 2015 to jointly cooperate on facilitating capital market development conducive to financing investment; creating an environment that encourages investment in various sectors in India; and working to overcome any obstacles to such investment"

Majumdar said...

Prof sb,

So you are saying that Western investors have sunk a trillion dollars in India inspite of getting a lower ROI than Pakiland, just because US Govt asked them to do so?


Riaz Haq said...

The Indian stock market, as reflected by the S&P BSE Sensex, has fallen by at least 2,100 points or 7.1% from its highs and is adjusting to the reality of subdued earnings. Company results for the January-March 2015 quarter, so far, have not been encouraging, though analysts expect things to improve by the second half of the current financial year. The street expects earnings to get better with the improvement in business environment and pick-up in economic activity. Put differently, in the medium term, market movement will largely depend on the pace of expansion in the economy, which, to a large extent, will be determined by government action and implementation of ideas such as increasing capital expenditure.
Interestingly, even as some investors are getting edgy and expect quick government action on various fronts, observations from some of the international institutions that came in this month were largely optimistic about the future of the Indian economy. Encouraged by the recent policy action, rating agency Moody’s, while affirming its Baa3 rating on India, changed its outlook to positive from stable. It said in a statement: “…recent measures to address inflation, keep external balances in check, simplify the regulatory regime for investors, increase foreign direct investment, and facilitate infrastructure development will reduce some of India’s sovereign credit constraints.”
The government’s intent to improve the economic environment and action taken in this regard is being recognized. “Growth will benefit from recent policy reforms, a consequent pick-up in investment, and lower oil prices. Lower oil prices will raise real disposable incomes, particularly among poorer households, and help drive down inflation,” said the latest World Economic Outlook (April 2015) of the International Monetary Fund (IMF). Growth in India, according to the IMF, will be higher than that in China in 2015 and 2016, making it the fastest growing large economy in the world. It expects India to grow at 7.5% in both 2015 and 2016. Meanwhile, the Chinese economy is expected to expand at an annual pace of 6.8% and 6.3%, respectively.
The World Bank had similar observations about the Indian economy. In its South Asia Economic Focus (Spring 2015) report, it noted, “India’s economy is poised to accelerate on the back of an ambitious reform agenda, and faster growth is expected to further drive down poverty.” The acceleration in growth, according to the World Bank, will be led by investment, which is expected to grow at an average rate of 12% between 2015 and 2017.
However, not all are equally enthused. A recent report (India’s Fiscal Roadblocks Could Stall Infrastructure Progress) by Standard & Poor’s presented a different picture. “India’s public finances are less than rock solid due to long-standing cracks in its budgetary system. While the country’s budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock,” the report said. It also highlighted that further reforms will be required on the fiscal front to be able to sustain higher investment spending. Efficient subsidy spending, which can free up resources for capital spending, is necessary to attain and maintain higher growth in the medium to long term. Both markets and policymakers will do well by paying attention to Standard & Poor’s observations. In fact, a financial or commodity shock can not only affect the progress made on the fiscal front, but also the wider economy.

Riaz Haq said...

Just about two months after its managing director Christine Lagarde called India a “bright spot,” the International Monetary Fund (IMF) in its April 15 regional economic survey (pdf) again described Asia’s third largest economy by the same terms.
“Domestic and external vulnerabilities have moderated on the sharp decline in the current account deficit and inflation, the fiscal position has begun to improve, and a resumption of capital inflows allowed a significant buildup in foreign reserves,” the report said. “This confluence of achievements has made India one of the bright spots in the global economy.”
But all those kind words come with one big caveat: India needs to sort out its toxic banking assets.

In its policy requirements for the country (India), the IMF said that enhancing financial sector supervision and monitoring is warranted given the rise in corporate and financial sectors strains.
“Further progress is needed to strengthen prudential regulation for banks’ asset quality classification, augment capital buffers and improve corporate governance at public sector banks, and strengthen the insolvency framework,” it said.
To do this, the IMF said continued efforts are needed to gather information on and analyse the interlinkages between corporate vulnerabilities and the banking system’s health, particularly on the extent of unhedged foreign exchange exposures of large firms with international operations.
Indian banks have been struggling to keep toxic or non-performing assets (NPA) in check. An NPA, according to the Reserve Bank of India (RBI), is a loan for which interest and/or installment of principal remains overdue for a period of more than 90 days.
According to latest data from the RBI, gross non-performing assets (GNPA) as a percentage of the gross advances inched up to 4.45% as of March 15, compared to 4.1% a year ago.
“Asset quality has seen sustained pressure due to continued economic slowdown,” S S Mundhra, a deputy governor of the RBI, said in a speech (pdf). The level of distress is not uniform across the bank groups and is more pronounced in respect of public sector banks, he added. GNPA for public sector banks for March was at 5.17%.

Of course, this is something that India’s banking sector has been grappling for some time now.
“I think, the most immediate problem we have to confront is that of rising level of stressed assets in the banking system. Fortunately in the last quarter those levels of stressed assets tapered off or flattened out,” RBI governor Raghuram Rajan said last July. “But, it is too early to declare victory.”

Riaz Haq said...

#India Worst performing stock market? This is the end of the Modi bubble for FIIs

Is PM Narendra Modi running out of luck? He had famously boasted being a lucky Prime Minister while seeking votes during the Delhi elections. The context, of course, was international oil prices had less than halved and that seemed to have brought all round uptick in economic sentiment, what with the stock markets soaring to new highs early 2015. Consensus among global FIIs was that they will remain overweight India as compared to other markets like China, Brazil, South Korea, Taiwan and Russia. But everything seems to be reversing over the past month and a half.
Suddenly the FIIs, with a cumulative investment in Indian stocks of about $300 billion at market value, are looking at other emerging stock markets for returns and no longer treat India as the most preferred destination as they did last year, and even the beginning of this year. FII net outflows gave been of the order of Rs 12,500 crore over the past month. The stock market index has seen the biggest correction of 10 percent in a short time. This has caused speculation whether the markets are slipping into a bear phase.

But what is indeed worrisome is India is probably the worst performing stock market among emerging economies this year. This is in sharp contrast to the view taken by the big FIIs that the Modi government reforms could trigger a multi-year bull run in India. Now the same FIIs are shifting the weightage of their global allocation to China where the stock markets have shown 30 percent growth since January. India's Sensex growth remains in negative territory. Even FII inflows, which primarily influence market movement, are flat to negative since January.
Worse, now FIIs also seem to prefer oil exporting markets like Russia and Brazil, both of whom had fallen out of favour after the global oil prices had more than halved, badly affecting their revenues. Now the FIIs believe that oil prices are moderately correcting and returning to oil exporting markets like Russia and Brazil makes sense. This view is buttressed by another major consideration. They feel as the US economy recovers and the prospect of monetary tightening by the Federal Reserve brightens, the dollar would strengthen in the short to medium term.

The Economic Times has just reported a survey of top CEOs and the majority of them suggest that demand is depressed. "The bonhomie and cheer that greeted the arrival of the Modi government is replaced by a sombre mood and a grim acknowledgement of the realities of doing business in India," reports ET, as it captures the sentiment of the CEOs. Little wonder that this is reflecting in the behaviour of the stock market and currency. The largest engineering conglomerate L&T had said some of its plants are lying idle as demand for capital goods is very weak. The Aditya Birla Group had deferred its revenue target of $65 billion by 3 years, to 2018.
These are not good signs for the economy and both the stock market and currency will reflect this in the months ahead.

Riaz Haq said...


Months after the release of the new GDP methodology with much higher numbers, it still remains wildly inconsistent with numerous other indicators, pointing to continued economic slack.
The revised GDP numbers particularly pose dangers for monetary policy decisions, as much of India expects the RBI to cut rates.
RBI Governor Raghuram Rajan and the government’s Chief Economic Adviser Arvind Subramanian, two trained economists, remain 'puzzled' with the new numbers.
Part I of this article series looked at the change in the methodology of calculating India's GDP that literally overnight transformed an 'ailing' economy into one of the best performing economies globally. The problem is not with the methodology per se. The methodology is the same that is globally accepted; the problem is with the missing comparable numbers as per the older methodology, and the missing longer term historical data for the new one (not necessary that historical data beyond three years be made public, but it should at least be made available to statisticians doing the exercise and to other approved authorities for scrutiny/confidence building).
Presented here are some of the related data over the years to get a comprehensive picture. The Index of Industrial Production (IIP) data reveal two insights: Post 2008, there may have not been a sustainable recovery but a sharp bounce back in 2011 which can be attributed to a typical inventory bounce back as normally seen after a period of sharp decline like the one during the 2008-09 period. In a slowdown, cut back in production is multiplied by the effect of sharp inventory reductions, making the situation even worse. An inventory bounce back is the opposite of it. With signs of recovery, companies start filling up shelves again faster than the real demand. The Economist blog, referred in Part I, first suggested that based on the IMF's World Economic Data following market prices, India grew faster than China in the April-March 2010-11 financial year of India's vis-à-vis China's calendar year of 2010. This observation synchronizes well with the inventory bounce back of IIP numbers observed in the following IIP chart.

The IIP for March, reported on 12th May, came in at a five-month low of 2.1%, making the yearly average for 2014-15 at 2.8% compared to a contraction of 0.1% for 2013-14.

True, there are masquerading voices within India with political inclinations who find nothing wrong in this overnight cure of the ailing economy. The same voices blamed the last government for the economic slowdown, which now becomes imaginary, as per the new methodology. The falling earnings (the last quarterly earnings of 101 companies, that declared results by 27th April or so, fell by 9.23%) and the continuous deterioration of balance sheets of companies, especially banks, convincingly debunk any such hypothesis. It also exposes the charade behind the new GDP numbers. Merely stating how the IIP numbers simply do not matter anymore in the methodology, directly or indirectly, may not be the whole truth. The deterioration of balance sheets is the root cause for the increasing NPAs in Indian banks, mostly state-owned ones, without any certainty as of now on whether or not NPAs have reached a saturation level. This is what RBI Governor Rajan said on NPAs on 17th April:

"The non-performing assets have been growing. I'm hopeful that we are near the peak or that we have even passed the peak, but we won't know until it is truly clear with the passage of time."

Similarly, a look at India's trade data shows a sharper slowdown (21%) in exports than in imports (13%) for the last reported month (March 2015). There is an overall decline in both for the year too.

Riaz Haq said...

India GDP growth is one-third statistical illusion

India’s GDP growth is now one-third a statistical mirage. Unless something has changed dramatically in recent years in how companies and consumers behave, the economy is more likely to be expanding at 5 percent, not the 7.5 percent claimed by the authorities.
The illusion comes from a recent supposed improvement in the way India calculates its Gross Domestic Product. In theory, Indian GDP is now closer to international standards. In practice it has become utterly unreliable. Depending on it could easily lead India’s monetary policy astray.
This week, investors dumped Indian assets after the Reserve Bank of India cut its benchmark interest rate by a quarter percentage point. Central bank governor Raghuram Rajan felt compelled to explain why he had reduced borrowing costs five days after the country’s statistics office claimed stellar expansion in GDP. But investors were upset that Rajan was not doing more to revive a slowing economy.
But just how sluggish is the economy really? Breakingviews tried to answer that question by looking at three indicators: corporate earnings, auto sales and imports of computer software. The logic is straightforward: retained earnings finance new investment projects; auto sales are a proxy for consumer demand; while software imports reflect productivity gains. Mixing the three in a simple index suggests that growth in the most recent quarter was closer to 5 percent.
Combining indicators of demand and supply will annoy the purists. However, the rough-and-ready gauge reliably predicted GDP growth in the coming quarter between 2005 and 2011.
Back then India’s methodology for adding up output was more robust. The new GDP data is another matter. Take the third quarter of 2013, when the country came perilously close to a currency crisis. The Breakingviews index shows GDP growth stalling. But according to the new official data, the economy grew at its fastest rate in nine quarters.
The faulty monitor continues to give misleading all-clear verdicts on the economy. It’s now more than a persistent irritant. There’s a serious risk that policymakers could underestimate the output shortfall, thereby aggravating the deficit. GDP is everywhere a statistical artifact; but in India, the illusion of growth is threatening to make the reality worse than it is already.

Riaz Haq said...

#Modi's #India’s exports contract for a sixth month, down 20.2% in May - Livemint #MakeInIndia …

The Indian commerce ministry announced on Tuesday that India’s exports fell 20.2 percent compared with the same month last year (LiveMint, Reuters). This announcement makes May the sixth consecutive month in which exports have fallen and this is the the longest such streak since 2009. The ministry also announced that imports fell by 16.5 percent, bringing the overall trade deficit to a 3 month low. According to the data gathered by Bloomberg, in May, oil imports fell 41 percent to $8.53 billion, non-oil imports fell 2.2 percent to $24.21 billion however gold imports grew 10.5 percent to $2.42 billion. A weakening rupee and an acceleration in inflation indicates maneuverability is decreasing for Reserve Bank of India (RBI) governor Raghuram Rajan to lower interest rates any further. RBI has already cut the interest rates in the country three times this year.

The Indian rupee touched the day’s low soon after the data. The currency has weakened 2.1% over the past three months, the fourth-worst performance among 24 emerging market currencies tracked by Bloomberg. Bloomberg

Riaz Haq said...

Is #Indian #GDP data believable? 5 Indicators That Contradict #India’s Official GDP Figures via @WSJIndia

India registered 7% growth between April and June on Monday, making it one of the world’s fastest-growing economies, according to official data.

But other key indicators of economic vitality aren’t as positive.

Vehicle sales last quarter didn’t show the kind of growth you would expect from an economy expanding at a rate of more than 7% per year. Car, truck and two-wheeler sales are good indicators of consumers, corporate and farmer sentiment respectively. Overall vehicles sales barely budged last quarter, rising just 1% to 4.89 million vehicles. Passenger vehicle sales were up 6.17%, commercial vehicle sales were up 3.55% and two-wheeler sales were up just 0.64%.

Indian officials had hoped for a pick-up in overseas demand for Indian-made products as Western economies gathered momentum. But the country’s exports have fallen for eight months in a row through July, underscoring continued stress in global economies.

In the year ended March 31, India’s exports totaled $310.5 billion, falling about 9% short of the $340 billion target. In the first four months of the current fiscal year things haven’t improved: goods exports have recorded a 15% decline–compared with the same period last year–to $89.83 billion. China’s move to devalue its currency has given its producers a competitive edge, damping export prospects of other economies, including India. In addition, the sharp drop in global crude oil prices, while good for India’s import bill, has come as a major downer for Indian petroleum product exports, which make up a big chunk of the South Asian economy’s total shipments.

The Indian currency hit a near two-year low against the dollar last week in the midst of the global selloff and was among the worst performing currencies in Asia. Fear among investors that the slowdown in China could cause a global slump was the main drag on the Indian currency. Analysts say the depreciation in the rupee is necessary to keep India’s exports competitive. They expect some more weakness later this year, depending on the U.S. Federal Reserve’s decision on lending rates. Foreign investors became big sellers in the Indian debt market in August, putting pressure on the rupee as they took dollars out of the local market.

The benchmark Sensex index was one of the top-performing indexes last year, but so far this year it has failed to shine. Since mid-2014, investors bought stocks on hopes that the economy would rise faster and boost profits. But that outcome has been elusive and analysts have started cutting their Sensex targets. Ambit Capital now sees the Sensex falling to 28,000 points, down from its earlier target of 32,000. If the Chinese devalue the yuan again, the Indian stock market could fall further.

Profits at big companies have barely budged since Prime Minister Narendra Modi came to power in India last year. The chart above shows the percentage growth of profits of companies in the benchmark Sensex index compared to a year earlier.

According to a Bank of America Merrill Lynch report, the profits of Sensex companies rose by only 1% during the April through June quarter, compared with 24% growth in the same period a year earlier.

Utilities and cement companies have dragged the average earnings growth as big private sector and government projects remained stuck waiting for government approvals. Metal and refining companies suffered due to the decline in oil and commodity prices.

Riaz Haq said...

Meanwhile, the Indian rupee has lost 5.8% this year against the U.S. dollar, while the Brazilian real is down 31% and the Russian ruble is down 13%. The Chinese yuan is down 2.6%, but the currency has been propped up by Beijing despite an Aug. 11 devaluation, the most significant downward adjustment since 1994.

Stocks also paint a less painful picture for India.

India’s S&P BSE Sensex has fallen around 8% since the beginning of June. China’s stock market started tumbling in mid-June as local investors worried about the country’s high level of debt and its growth prospects. China’s Shanghai Composite Index has lost nearly 30% from the start of June through Wednesday, while Hong Kong’s Hang Seng Index, where foreigners can invest freely, has lost 19% over that period and Brazil is down about 10%.

To be sure, investors have been disappointed by India’s economy and the pace of reforms since the government of Narendra Modi came to power in May 2014. In anticipation of stronger growth and policy overhauls, the Sensex had gained nearly 30% in 2014, making it one of the best-performing major markets in the world.

Though India’s gross domestic product grew at a 7% rate for the April-to-June quarter, versus 5.7% growth in the same period in 2014, analysts attribute that partly to a change in the way the growth data are calculated. Company profits have barely grown, and now analysts say it could be another year or more before earnings pick up substantially.

The outflow of funds from India last month, surpassing even those from Brazil, a country facing more fiscal and economic challenges, partly reflects that disappointment.

Brazil had outflows of $940 million from its stock market, according to the Institute of International Finance. South Africa, another big emerging market, posted a net inflow of $190 million in August. Those data aren’t available for China and Russia, the IIF says.

To some degree, however, India was hurt by its own popularity. When global investors want to reduce their risky investments, they tend to sell stocks that are most liquid and have performed well.

Riaz Haq said...

Continuing confusion over #India GDP official stats. Deflator Problem via @sharethis

What is the source of the confusion? In the first quarter of 2015 (1Q15; all references are to calendar year) GDP growth surprised sharply to the upside, printing at 7.5 per cent, even as activity appeared soft on the ground. Corporations had their worst quarterly earnings in six years, a sharp fiscal squeeze was applied to meet the deficit target and agriculture was experiencing a drought year. Yet, national income accounts showed that GDP growth had accelerated sharply from 6.6 to 7.5 per cent — raising several eyebrows.
In the next quarter, exactly the opposite happened. Earnings improved and consumption was palpably benefitting from the collapse in oil and food prices. Yet, against all expectations, GDP growth decelerated to 7 per cent. What explains this disconnect?
The GDP is the sum of gross value added (GVA; at basic prices) and net indirect taxes (NIT). The GDP can be thought of as the whole pie, whereas GVA is the slice appropriated by labour and capital, and NIT is the slice appropriated by the government. There appear to be no particular issues with the dynamics of the GVA in recent quarters, though questions remain about the level of growth thrown up by the new GDP methodology — and whether that syncs with events on the ground. But that’s another debate. GVA growth slowed sharply from 6.8 per cent in 4Q14 to 6.1 per cent in 1Q15 and then re-accelerated to 7.1 per cent in 2Q15, as expected.
Instead, the issue lies with NIT. Real NIT growth jumped from 3.7 per cent in 4Q14 to 18.9 per cent in 1Q15, but then fell off dramatically to 6.5 per cent 2Q15. This is hard to comprehend. NIT should rise if collections rise or subsidies fall. So why did real NIT fall so dramatically in 2Q15, if underlying growth (as captured by the GVA) and, therefore, tax buoyancy, was higher and subsidies lower?
The problem lies with translating nominal into real quantities; what economists call the “deflator”. The idea is simple: we want to deflate out all price movements so as to capture “real” economic activity. In the case of NIT, we also have to deflate out changes in tax rates or bases. Herein lies the nub of the problem. In nominal terms, NIT growth increased, as we would expect, to 22 per cent (year-on-year) in 1Q15 and to 40 per cent in 2Q15 — excise and service tax rates were hiked, activity grew and subsidies collapsed. But in real terms, growth decelerated sharply. Why? Because the implicit deflators used were 2.6 per cent in 1Q15 and a whopping 31.4 per cent in 2Q. This completely skews real NIT and GDP growth.
Both numbers are hard to reconcile. There was virtually no inflation (as measured by the GVA deflator) in 1Q and 2Q15, so the deflators should largely be reflecting tax rate changes. Consider this: The weighted average increase in excise duties for petrol and diesel was 130 per cent in 1Q15, compared to the same period the year before. Just these tax increases — given the share of oil excise in total tax collections — should have resulted in a deflator of 8-9 per cent. This would have resulted in 1Q15 GDP growth printing at 6.9 per cent, not 7.5 per cent. Why then a deflator of 2.6 per cent? And why the humongous jump in the deflator to 31.4 per cent in 2Q15? True, service taxes were hiked by about 13 per cent (from 12.36 to 14 per cent), but this was only applicable for one month (June) of the quarter. The service tax base was also increased slightly. But how does this result in 2.6 per cent jumping to 31.4 per cent?

Riaz Haq said...

Falling #Indian exports raise questions about #Modi's #GDP growth claims and Make in #India …

The slump in exports by 20.1% in August seems to have finally set alarm bells ringing as the exporters are now demanding that both the prime minister and commerce minister step in to help and prop up the sector. The demand is reasonable given that exports have now fallen for the ninth consecutive months dragging down total exports by 16.2% in April-August 2015-16. It is also worrisome because the fall in exports have now stretched into the second year having already fallen by a marginal 1.2% in 2014-15.

So far the government has tried to cover up the discordant trends on the trade front by pointing to the steady improvement in the current account deficit numbers which have now fallen to around 1.2% in the most recent quarter after peaking at above 5% just a few years back. However, the fall in current account deficit has little to do with export performance as it happened largely to the slump in oil prices and the restraints placed on gold imports.

But now the scenario has deteriorated far below acceptable levels. Exports as a percentage of the GDP has fallen from a high of 16.8% of the GDP in 2011-12 to 15.4% in 2014-15. The fall in goods exports has substantial repercussion not only on growth of the economy and also on the NDA governments much vaunted Make in India programme. Studies have pointed out that few countries have been able to grow at 7% plus growth rates based on domestic demand alone.

Numbers for the first five months of the year show that the fall in exports have been across board. Asia, which is India’s largest export market accounting for almost half the total exports, has been badly effected with exports declining by 16.2%. The scenario was no different in the EU, our second largest export market that accounts for close to a fifth of our imports, which also saw exports decline by 10.5%. Worse effected was West Asia our third largest market where exports fell by 16%. Markets in Asean also registered a fall of 22.7%. The only consolation was the exports to USA, which accounts for 16% of our total exports, registered a minimal fall of 1.1%.

Riaz Haq said...

Commodities collapse cuts imports but also hurts #India's exports: Petroleum, gold jewelry, Iron ore, cotton, food

Slumping global commodity prices are typically seen as a boon for India, a country that relies heavily on oil imports to service its energy needs, but a closer look indicates it's not all good news.

That's because least 35 percent of India's exports come from commodities-linked products including refined petroleum, gold jewelry, gems, iron and steel. While typically lower input costs should burnish profits for these companies, prices of the final goods Indian manufacturers crank out have also slumped.

"India's miners are seeing sharp contraction in their earnings, agriculture commodity producers are seeing their earnings affected due to the weak price of agriculture products, and the gems/jewelry sector is undergoing a major downturn," said Taimur Baig, chief economist at Deutsche Bank.

The export value of refined fuels – which make up nearly one-fifth of total exports - is down 51 percent on-year this fiscal year, for example, amid falling prices and weak demand. Similarly, gold jewelry exports are down 20 percent on year, while iron and steel exports are down 30 percent, according to the bank.

Of India's top five export destinations – the U.S., United Arab Emirates, Hong Kong, China and Saudi Arabia - exports to China have slowed the most, followed by Saudi Arabia.

While India is not nearly as export-oriented economy compared with many of its Asian neighbors, exports account for a sizable portion of its gross domestic product (GDP) - approximately 15 percent.

Thus, "benefits from lower prices and import costs are being offset by weakness in the domestic commodity sector," Baig said.
"It is clear that India's growth recovery is unlikely to be supported by a vigorous rebound in the external sector anytime soon. Therefore, it is evident that domestic demand would have to play a bigger role in supporting India's growth recovery in this cycle, mainly though a meaningful turnaround in capex and investment," he added.

Banking sector risks

Not only is the commodities slowdown weighing on India's exports, which tanked a whopping 20.7 percent on year in August, it also poses a threat to the country's banking sector.

"India's banks have sizable legacy exposure to stressed sectors such as steel, mining, and infrastructure; their recent loan growth has also been largely toward these sectors," said Baig.

"The commodity headwind is pushing up likelihood of further NPLs [non-performing loans], casting a shadow on the banking system," he said.

Read More Why it could get even worse for materials stocks

India's state-owned lenders are already struggling with deteriorating asset equality as a result of the economy's slowdown in recent years and stalling of large infrastructure projects.

Monetary policy challenge

The correction in commodity prices is also overstating disinflation in India, says Baig, posing a challenge for monetary policy.

"Pressure on the RBI [Reserve Bank of India] has risen considerably to ease policy interest rates. Non-commodity prices, however, are hardly in benign territory," Baig said.

"Education costs were up 6 percent on year through August and the same was with clothing. Thus the issue of how much room is available for the central bank to cut rates with a view to its medium term inflation objective of around 4 percent is being complicated by commodity price driven disinflation," he said.

The RBI is due to hold its next policy meeting on September 29, when it is expected to cut interest rates by 25 basis points to a four-year low of 7 percent. It has reduced its key policy rate a total of 75 basis points this year, standing pat at its last policy review in August.

Riaz Haq said...

#India's August exports shrink for ninth straight month, fall 20.7%. #Modi #BJP

NEW DELHI: Contracting for the ninth month in a row, India's exports plunged by 20.66 per cent in August to US $21.26 billion, widening the trade deficit.

READ ALSO: Devaluation of yuan will affect India's textile exports

The significant slump in country's exports is attributed to global slowdown and declining commodity prices worldwide.

In August 2014, the merchandise exports had amounted to US $26.8 billion. The last time exports registered a positive growth was in November 2014, when shipments had expanded at a rate of 7.27 per cent.

Imports too declined by 9.95 per cent to US $33.74 billion in August this year due to high gold imports, leaving the trade deficit at US $12.47 billion, according to the data released by the Commerce Ministry.

However, the trade deficit has narrowed in August as compared with July this year, when the figure stood at US $12.81 billion.

In August last year, the deficit was US $10.66 billion.

Gold imports rose by 140 per cent to US $4.95 billion in the month under review from US $2.06 billion in August last year.

The main exporting sectors which reported decline in exports include petroleum products (fall of 47.88 per cent), engineering (29 per cent), leather and leather goods (12.78 per cent), marine products (20.83 per cent) and carpet (22 per cent).

Exporters expressed concerns over the continuous decline.

Riaz Haq said...

If #India economy is really growing 7.4%, why is consumer sentiment at 3-year low? Is #Modi fudging GDP? #BJP …
The survey shows that not only are consumers worried about current conditions, they also don’t expect any improvement in the medium term. Photo: Ramesh Pathania/Mint
Indian consumers are turning increasingly pessimistic about the economic recovery. The MNI India Consumer Sentiment Indicator, from Deutsche Borse, fell to a three-year low in September, suggesting that demand continues to be lacklustre. That sentiment is completely out of sync with the rosy estimates of gross domestic product (GDP) growth. The survey shows that not only are consumers worried about current conditions, they also don’t expect any improvement in the medium term.

“Seen through the eyes of our survey respondents… the short- to medium-term outlook looks less compelling, with consumer confidence at a record low and little sign of a quick turnaround, ” said MNI chief economist Philip Uglow.

Simply put, the 75 basis points rate cut that happened from January to September wasn’t good enough to boost demand and convince consumers that things will improve. One basis point is one-hundredth of a percentage point.

It’s not just consumer sentiment that is pessimistic. Expectations for business conditions improving one year from now fell to their lowest since September 2013, when India was battling a sharply depreciating rupee. Besides, consumers were the least optimistic about their household finances, with both current and future measures of personal finances falling to record lows.

This level of pessimism ties in with other indicators as well. For instance, the Nikkei Purchasing Managers’ Index (PMI) for India shows there has been no improvement in manufacturing employment since the Narendra Modi government took charge at the Centre.

In September-end, the Reserve Bank of India (RBI) cut rates by another 50 basis points to boost demand. It remains to be seen whether it will boost the much-needed confidence.

“So far the rate cuts have had little impact, with consumers particularly concerned about their finances. The recent cut in the policy rate by RBI should help, although for now our survey suggests that household spending will remain capped,” said Uglow.

Riaz Haq said...

#India's #poverty is understated and its #GDP is exaggerated, says #Nobel Prize winner Angus Deaton. #BJP #Modi …

Deaton, however, believes that the poverty rates could be even higher. There is surely some omission in the surveys, which would mean that poverty is understated", Deaton told Hindustan Times in an interview.
He also said that the economic growth in India is not as high as the government presents it to be. India is said to be world's fastest-growing economy at 7 per cent growth rate.
"Everyone's data can be improved. I think it is widely recognized that the national accounts in India are relatively weak. So what I am most worried about is that growth is not as high as the accounts show. Revisions that increase growth are more readily accepted than revisions that reduce growth. So I am more worried about growth being overstated than poverty being understated," he added.
According to Deaton, the Indian government needs to invest more in nutrition, health and education of the young generation of the nation if it wants to overcome the growing poverty rate.
"Yes, though there are organizational and capacity problems that need to be overcome. In places where services don't work, for example, because of absenteeism, putting in more money is unlikely to help. But if other states can emulate the better services in the south, with more people demanding health and education, then we can make progress, and to do that, we will eventually need more money," he said.
Deaton, the Princeton University Professor, has done a thorough analysis of consumption and poverty in India. He contributed majorly to estimating India's poverty rate in 1990s with his work on India's malnutrition.

Riaz Haq said...

French Economist-Author Thomas Piketty to #India’s "Hypocritical" "Self-Serving" Elite: ‘Learn From History’

After he fled to the authors’ lounge, Mr. Piketty told me that he found the elite of India “hypocritical” for urging their government to address inequality by pouring resources into economic development, like building infrastructure or helping selected industries. This is self-serving, he says, and only increases the gap between the rich and the poor. In his opinion, governments should find the means to invest more in social welfare, like primary education and health care.

Before the world wars, he said, “the French elite used to say the same things that the Indian elite now say, that inequality would be reduced with rising development.” But after the wars, he said, the French began to see that direct investment in welfare was the way forward.

“I hope the Indian elite learn from the stupid mistakes of the other elites,” he said. “Learn from history.”

India is just emerging from what many regard as a catastrophic experiment in a type of socialism, the sort that economists like Amartya Sen, the Nobel laureate, say was not socialism in the first place, because it neglected health care and primary education. What the Indian elite learned from that history was to fear and loathe the idea of the welfare state.

In 1991, India reached the nadir of an economic crisis that forced it, in exchange for a financial rescue from the International Monetary Fund, to begin liberalizing its economy along the free market lines that were championed then by Washington. In the years that followed, the rich and the educated benefited the most, though the poor are better off today than they were before those changes.

Having prospered in recent decades, the Indian elite have faith in this economic model. But there is also a wide acceptance that India’s inadequate investments in education and health are holding the nation back.

“The problems India is trying to solve are problems other countries are trying to solve,” Mr. Piketty had said during his lecture. “India is trying to solve very complicated problems.”

Riaz Haq said...

Big International Asset Managers Leaving #India - #Goldman #Fidelity #MorganStanley via @FT

International asset managers in India are disappearing at an alarming rate.
Goldman Sachs Asset Management, the $1.19tn fund arm of the US bank, became the fourth global investment manager to quit the country last year. It announced plans in October to sell its mutual fund business to Reliance Capital, India’s third-largest asset manager.

Just weeks earlier Belgium’s KBC Asset Management said it would terminate its push into India with the sale of its stake in Union KBC Asset Management to Union Bank of India.
Fidelity Worldwide Investments, PineBridge Investments and the asset management arms of Morgan Stanley and Deutsche Bank have all sold their mutual fund businesses in the country over the past three years.
The fund houses are reluctant to discuss the reasons behind their exit, but analysts say India has not been the cash cow many asset managers expected.
Sze Yoon Ng, an Asia-based director at Cerulli Associates, the research company, says: “Most [foreign asset managers] are not making money.”
Intense competition, regulatory uncertainty and problems getting fund ranges in front of end investors has meant is not unusual for a foreign asset manager in India to make a loss even after 10 years in the country. “It is hard to stay optimistic when your three-year break-even plan stretches to 10 years and counting,” says Ms Ng.
Fund companies were initially tempted by India’s growth story — its emerging middle class and strong economic expansion. Banking on a population of ready-to-invest consumers, asset managers kept coming to the country, say experts.
“Foreign asset managers saw potential in India: it is a huge country, with great demographics,” says Daniel Celeghin, a partner at Casey Quirk, the consultancy. He has worked with asset managers hat have operations in India. “But you have to be willing to put a lot of time and effort in.”
Franklin Templeton Investments is one of the few global asset managers to have cracked the Indian market. It set up shop 20 years ago and is now the only fully foreign-owned asset manager among India’s top 10 fund houses.
Harshendu Bindal, president of Franklin’s operations in India, says many foreign asset managers came to the market too late and failed to understand the nuances of the country’s “hyper competitive” mutual fund industry.
The market is dominated by just a handful of asset managers. The 10 largest fund houses account for more than 77 per cent of the $200bn of assets under management in India. Lakshmi Iyer, head of investments and product development at Kotak Mahindra Asset Management, the ninth-largest investment manager in India, says the concentration of assets among the top providers “increases the time taken to break even” for entrants.

Rather than go it alone, several international asset managers have tried to gain a foothold in India by partnering with local banks and other financial institutions to create mutual fund businesses.
India’s biggest asset manager, HDFC Asset Management, is a joint venture between Standard Life Investments, the UK fund house, and HDFC, a bank. Prudential, the UK-listed insurer, and local provider ICICI Bank operate ICICI Prudential Asset Management, India’s second-largest asset manager. BlackRock and Amundi Asset Management also have joint ventures in the country.

Riaz Haq said...

Big International Asset Managers Leaving #India - #Goldman #Fidelity #MorganStanley via @FT

But international fund houses frequently find joint ventures difficult to navigate. “You have to realise you will be junior partner to a local firm,” says Mr Celeghin, adding that this is something global asset managers are uncomfortable with.
Foreign asset managers face several other challenges, including being unable to sell international products, such as mutual funds regulated in Europe. Instead, they need to set up local funds. These are typically focused on Indian stocks and shares, partly because of restrictions on what can be sold to retail investors. “If you want to do business in India, you need to have an investment team in the country to create and run a fund, and that is costly,” says Mr Celeghin.

Distribution can also be an obstacle. Banks tend to favour the products of their own asset management arms, according to Cerulli. Meanwhile, the regulatory landscape for financial advisers, which control around 30 per cent of the mutual fund market, has been in flux.
In 2009, the Indian regulator introduced rules for mandatory disclosure of rebates — money paid from asset managers to financial advisers to entice them to sell their products. This was later overturned. The Securities and Exchange Board of India has also mooted phasing out commissions entirely, but this looks unlikely at the moment.
“The business environment is one where the rules are changing frequently. It is hard to get clear guidance on what twist or turn can be expected in the future,” says Mr Celeghin.
Ajit Dayal, chairman of Quantum Asset Management Company, which sells funds directly to investors, says: “While [the regulator] is trying to force the industry to adopt a more transparent practice, the distribution industry is dominated by large banks and brokerages and it is not in their interest to necessarily have a more competitive market.”
As a result, foreign asset managers have struggled to mop up assets. Goldman Sachs’s Indian fund business had just $1.1bn in assets under management when it announced plans to sell its mutual fund business.
But Franklin’s Mr Bindal says fund houses that depart are missing a big opportunity. Despite the challenges in the country, India’s fund industry is growing rapidly. Since March 2012, the market for Indian mutual funds has almost doubled in size, according to data from the Association of Mutual Funds in India, the local trade association.
He believes investment companies just need to work harder. “India is truly an attractive market for asset managers,” he says.

While one international asset manager after another has fallen away in India, Franklin Templeton Investments appears to have found the recipe for success.
It was one of the first international fund companies to enter the country, setting up after the government announced plans to allow non-banks to manufacture mutual funds in the early 1990s.
Harshendu Bindal, president of Franklin Templeton in India, says its early foray played an important role in helping it become the country’s seventh-largest asset manager.
“We are one of the oldest fund houses in the country, with a 20-year record, which gave us a long head start [on other foreign asset managers],” he says.
The fund house, which manages $10bn in assets in India, set up a range of local funds, introduced trail-based commissions to incentivise distributors to sell its products and launched various savings products, such as its Family Solutions range, in order to win business.
Patience is vital to success in India, says Mr Bindal. “A fund house may need anywhere between five and seven years, or at times even a decade, before it turns profitable.”

Riaz Haq said...

Reserve Bank of #India Governor Raghuram Rajan sceptical about GDP calculation. #Modi #BJP via @sharethis

Reserve Bank Governor Raghuram Rajan on Thursday raised a question mark over the way gross domestic product (GDP) is calculated in the country stating that “we get growth because people (are) moving into different areas”.
Value addition to the GDP is important when people move into newer areas of work rather than just a rise in the growth numbers, Rajan said while asserting the need to be careful in counting GDP numbers. Industry experts and economists had in the past expressed skepticism over the calculation of GDP numbers according to the new methodology.
“So, in that sense we have to be a little careful about how we count GDP because some time we get growth because people (are) moving into different areas. It is important that when they move into different areas they are actually doing something which is more value added,” Rajan said.
Speaking at the 13th convocation ceremony of the Indira Gandhi Institute of Development Research in Mumbai, the RBI Governor gave an example of two neighbouring mothers who babysit each other’s child and get paid an equal salary. He said both the mothers getting paid a salary will be an addition to the GDP but may not be an exact reflection of an economic growth.
“If mother A went to look after the children of mother B and mother B went to look after the children of mother A, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off? Presumably, kids want their own mother rather than the neighbouring mother. And the economy would be worse off,” Rajan observed.
According to the government’s mid-year economic review, the economy is now expected to grow at 7-7.5 per cent in the fiscal year ending March 2016, down from an estimate of 8.1-8.5 per cent announced in the Budget in February. In January 2015, the government led by Prime Minister Narendra Modi changed the base year for computing national accounts which pushed up the economic growth rate for 2013-14 to 6.9 per cent, while earlier estimate on the basis of old series was 4.7 per cent. These changes follow a revision in the base for calculating national accounts to 2011-12 from 2004-05.
Pranab Bardhan, a professor at the University of California, Berkeley, who was the guest of honour at the event raised the point on the possibility of restructuring the current system of capital subsidies to wage subsidies through which the business sector could be actively involved in worker training programmes as well as identifying good workers. Supporting the issue, Rajan stated there is a need for incentivising employment rather than providing subisidies on capital. “Apart from direct tax benefits for investment, we also give subvention on loans in many situations which subsidises capital. We may not do similar things for labour. Clearly, trying to incentivise the employment which will add skills to labour is extremely important,” Rajan added.
- See more at:

Riaz Haq said...

It is time we ( #India )stop thumping our chests for being "fastest-growing economy" #Modi #BJP via @firstpost …

You can trust Raghuram Rajan, the Reserve Bank Governor, to prick any balloon of excess optimism when required. Even as the idea of India being the fastest-growing major economy in the world gets bandied about carelessly, especially by politicians who would like to claim credit for it, Rajan had this to say yesterday (28 January): "There are problems with the way we count GDP, which is why we need to be careful sometimes just talking about growth."
Nor does talk of India overtaking China on growth make much sense. At five times India's GDP, our 7 percent economic growth equals under 1.5 percent China's growth in terms of its impact on global growth. China may be reeling under excessive debt and is painfully readjusting its economic engine towards domestic consumption, but India's problems are hardly any less stark. We have a corporate sector staggering under loads of debt, and banks that would be heading towards bankruptcy if they were not government-owned.
The problem with us is that we tend to celebrate success a bit too soon; even if politicians feel the need to claim success even if it was largely due to luck, there is no need for the media to keep claiming that we are the fastest growing economy. India reforms only when it is on the brink of economic disaster - as was the case in 1991 - and trying to pretend that all is hunky-dory is the last thing we need. We continue to be in deep trouble, and even though there is slow improvement in the growth cycle, we are far from being home and dry. And the seven percent growth we have taken for granted for now can be yanked from under us if there is a meltdown in China or another 2008.
India's misfortune is that we shifted to a new way of measuring GDP - gross value added - just when the government changed. So we have new data from the ministry of corporate affairs' five lakh company database whose validity we have no clue about adding to the confusion, as Rajan pointed out. This has given the NDA government unnecessary bragging rights.
Caculated on the more accepted old GDP methodology, we are probably more at six percent growth than seven percent.
The latest bank results - from ICICI Bank and Axis Bank - show that the rotten loan portfolio has now begun to infect even private sector banks. ICICI Bank reported a near one percent rise in gross non-performing assets in the December quarter, which sends a worrying signal. The bad loans scenario is clearly a bigger problem than we thought earlier.
This means the Modi government has much more work to do before it can claim some degree of success in turning around the economy. The UPA has handed it a poisoned chalice which it has been drinking heartily from, assuming it was amrut. Not quite.
Consider the mess it has inherited in so many sectors, and why cheap oil alone will not help.
First, cheap commodity prices help the government bring down inflation and the subsidy bill, but it also depresses the profits of oil and coal companies, and has roiled the steel sector.
Second, the mess in corporate and bank balance-sheets ensures that there is no stock market nirvana. Loads of public sector equity can't be sold as petroleum and banking stocks are a huge part of the indices and prices are deadbeat.
Third, big bills are coming up on one-rank-one-pension and the Seventh Pay Commission. The only way to pay these bills is to let the fiscal deficit go where it will in 2016-17 and rein it in from the year after.
One hopes the finance minister bited the bullet fully in his next budget.
Fourth, the UPA left the infrastructure and real estate sectors - two of the biggest potential job creators - grinding to a halt. Reviving both will be a herculean task.

Riaz Haq said...

#India's GDP numbers are so dodgy that even the nation's central bank has doubts about them. #Modi #BJP via @qzindia

The skepticism arrived soon after India’s Central Statistical Office (CSO) put out revised GDP numbers last January.
India’s chief economic advisor, Arvind Subramanian, said he was puzzled and mystified by the revised estimates based on a new methodology, which instantly raised the country’s GDP growth from 4.7% to 6.9% for the 2013-14 fiscal year. Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, called it a “bad joke.” And Raghuram Rajan, the governor of the Reserve Bank of India (RBI), said he didn’t want to talk about it until he understood the numbers better.
A whole year later, institutions like the RBI are so befuddled—and seemingly unconvinced—by India’s revised GDP numbers that they are looking at a range of other indicators to understand the true state of Asia’s third-largest economy.
“Like other economists, the RBI is now turning to hybrid models that mix elements of the old and new GDP methods to get a better feel for the underlying health of the economy,” Reuters reported on Feb. 5.

In particular, India’s central bank is tracking two-wheeler sales, car sales, rail freight, and consumer goods sales in rural areas “to get a better understanding of the ground realities,” an RBI official told Reuters. Quartz has emailed the RBI for comment, and will update if the bank replies.
The key contradiction is that even as prime minister Narendra Modi makes public declarations of India’s newfound status as the world’s fastest-growing major economy, key sectors such as manufacturing and agriculture are still stuck in a rut.
“The economy is recovering but it’s hard to be very definitive about the strength and breadth of the recovery for two reasons—economy is sending mixed signal and second there is some uncertainty how to interpret GDP data,” Subramanian explained late last year.

Riaz Haq said...

#India is pissed about the #US now charging more money for #H1B temp worker visas: … via @vicenews

The annual gold rush in Silicon Valley to fill out applications for guest worker visas began Friday, as the federal government began distributing some of the 85,000 H1B visas it is authorized to issue this year.

But the dash to grab visas is set against the backdrop of a political debate both within the United States and abroad about the regulations surrounding H1B visas, the government designation for visas designed for highly-skilled employees in "specialty occupations."

Just weeks ago, India filed a complaint with the World Trade Organization over an increase in fees on H1B visasthat the US imposed on companies with workforces comprised of more than 50 percent foreign workers. A provision included in last year's federal spending bill tacked on a new $4,000 fee the H1B visas, which India argues is discriminatory to the country under its trade agreement with the US.

India's complaint comes as Congress has been mulling other reforms to the H1B program to address allegations that companies are using the visas to hire cheaper foreign workers to replace American workers. The Senate Judiciary Committee held hearings earlier this year in which senators, including Ted Cruz and chairman Jeff Sessions, probed experts on whether US tech firms really needed more H1B visas to fill open positions, as they claim, and what protections might be put in place to ensure that American workers are being given preference for positions over foreign workers.

Related: The Los Angeles Unified School District Has Banned Immigration Raids on Its Campuses

"The intent of the program is to fill skills gaps in the US when American workers aren't available, but the reality is that the program has become a way for firms to create a business model that's about bringing workers who are cheaper into the US and to either substitute or directly replace Americans," said Ron Hira, a political science professor at Howard University, who testified at the hearing on February 25.

Hira said that foreign workers make anywhere from 20 percent to 40 percent less than their American counterparts within the program.

Two recent lawsuits accused companies, including Disney, HCL, and Cognizant, of firing Americans in order to hire H1B workers for less money. Leo Perrera, a former Disney employee who brought one of the suits, testified at the Judiciary hearing in February that "20 years of hard work, a bachelor's degree in information technology and an IT job for Disney were all over when my team along with hundreds of others were displaced by a less-skilled foreign workforce imported into our country using the H1B visa program."

The debate over whether the H1B program is hurting American workers rose to public consciousness amid the Republican primary debates earlier this year. Donald Trump said in one debate he supported expanding the H1B visas in one instance, but later said the system was "rampant with abuse." Ted Cruz has introduced a bill in the Senate that proposes some reforms to the programs, including minimum salary requirements for foreign workers, while Bernie Sanders has called for changes to the program. Hillary Clinton has, in the past, called for an expansion of the H1B program.

Cruz's bill is one of three bills proposing reforms to the H1B program currently in Congress. A bill proposed by Senator Chuck Grassley and Senator Dick Durbin would put in place a requirement that companies first seek American workers to fill open roles before applying to have them filled with foreign workers and would limit how many H1B workers a company could hire, while a proposal by Sessions and Senator Bill Nelson seeks to cut the number of H1B visas allocated each year.

Riaz Haq said...

#India’s sharp growth picture gets fuzzy. #Indian GDP is rough estimate, not actual measurement via @WSJ #Modi #BJP

India’s economy expanded by 7.3% last year, outpacing every other major nation, including China, for the first time in nearly two decades.

But as with most developing countries, where official statistics can be dicey even when they aren’t showing world-beating growth, India’s economy defies easy measurement. Most enterprises are tiny and unregistered, and most workers are employed off the books. The government’s infrequent surveys represent only a best guess of the value being added in back-alley workshops, outdoor markets and other cash-based corners of the economy.

So even if India’s measurement of gross domestic product, a broad indicator of activity, isn’t thought to be politically manipulated like China’s, it should come with a warning label: Handle with care.

GDP in India, “much more than in other economies, is more an estimate than a measurement,” said Neelkanth Mishra, a Credit Suisse economist in Mumbai.

The fog surrounding India’s GDP places challenges before analysts and policy makers—and just plain baffles some of them. The country’s central bank, sensing an economy running at less-than-full blast despite strong headline growth, has cut its main interest rate five times since the start of 2015.

One reason for the data murkiness can be found on Lal Bazar Street, a busy thoroughfare of tea merchants, typists-for-hire and a sitar shop in the heart of Kolkata, the country’s onetime colonial capital.

Within the dingy commercial buildings that line the roads in all directions are hundreds of addresses used to register shell companies, or ones used for tax-avoiding financial maneuvers and little else, tax authorities say.

Yet because these firms regularly file balance sheets to the government, they appear in a new official database of corporations—and get counted when statisticians tot up India Inc.’s contribution to national output.

India’s numbers have been under a microscope since it revised methods for estimating GDP last year, causing performance in earlier years to shoot up. Growth stayed brisk throughout 2015 even as exports, cargo traffic and other indicators disappointed.

A report from India’s Ministry of Finance said data-related uncertainty was causing economic signals to be “mixed, sometimes puzzling.”

The GDP revision included updates large and small. Based on an academic study of “dung evacuation rates,” goats and sheep were found to be contributing more to the economy, as producers of natural fertilizer, than previously thought. A much wider array of financial services is now being counted. But there are still areas where some observers, including the International Monetary Fund, see India’s data falling short.

To strip price changes out of a wide swath of GDP, for instance, India uses its wholesale price index—which, thanks to lower oil prices, has been decreasing for 17 straight months.

But many businesses, particularly services like finance and information technology, haven’t benefited much: Retail prices are still climbing at around 5% a year overall. If India’s statisticians were factoring in more of these price rises, then their inflation-adjusted GDP figures would be lower.

In a March report on India, the IMF criticized the use of wholesale prices in GDP. In a written response to questions, the country’s Central Statistical Office acknowledged the issue, but said that until India updates its inflation measures, the wholesale price index “remains the best available alternative.”

“There’s no rhyme or reason why the service sector would be deflated by WPI,” said Kunal Kumar Kundu, Société Générale SA’s India economist. “It’s basically a data availability issue. That will always continue to be a challenge.”

Riaz Haq said...

The Little Big Number: How GDP Came to Rule the World and What to Do about It Hardcover – May 26, 2015
by Dirk Philipsen (Author)

In one lifetime, GDP, or Gross Domestic Product, has ballooned from a narrow economic tool into a global article of faith. It is our universal yardstick of progress. As The Little Big Number demonstrates, this spells trouble. While economies and cultures measure their performance by it, GDP ignores central facts such as quality, costs, or purpose. It only measures output: more cars, more accidents; more lawyers, more trials; more extraction, more pollution--all count as success. Sustainability and quality of life are overlooked. Losses don't count. GDP promotes a form of stupid growth and ignores real development.

How and why did we get to this point? Dirk Philipsen uncovers a submerged history dating back to the 1600s, climaxing with the Great Depression and World War II, when the first version of GDP arrived at the forefront of politics. Transcending ideologies and national differences, GDP was subsequently transformed from a narrow metric to the purpose of economic activity. Today, increasing GDP is the highest goal of politics. In accessible and compelling prose, Philipsen shows how it affects all of us.

But the world can no longer afford GDP rule. A finite planet cannot sustain blind and indefinite expansion. If we consider future generations equal to our own, replacing the GDP regime is the ethical imperative of our times. More is not better. As Philipsen demonstrates, the history of GDP reveals unique opportunities to fashion smarter goals and measures. The Little Big Number explores a possible roadmap for a future that advances quality of life rather than indiscriminate growth.

The book advocates ditching GDP
completely, and having a national dialogue
about economic goals based on
the principles of sustainability, equity,
democratic accountability, and economic
viability. It isn’t clear how this
prescription fits with the several “dashboard”
initiatives under way now, which
are described here. Named in a nod to
the kind of indicator dashboards many
companies use, these include a number
of indicators meant to capture a broader
sense of social well-being, such as worklife
balance, environmental quality, and
civic engagement. They were recommended
by the influential Stiglitz-SenFitoussi
Commission in its 2009 report.
The dashboard approach is
attractive, as is public consultation.
However, it isn’t yet clear which dashboard
is best or what should go in it.
So the real need now in order to
create a “Beyond GDP” set of social
accounts is for the hard grind of the
kind that the forerunners and creators
of modern national accounts, Simon
Kuznets, Richard Stone, and James
Meade and their many colleagues, sustained
through the 1930s and 1940s in
creating GDP in the first place.
Some nominal aggregate measure
of activity is necessary for fiscal
and monetary policy. The national
accounts statistics as a whole also
contain a lot of the material that could
furnish a meaningful dashboard,
so again it would be a waste of an
intellectual asset to ditch all of that.
However, the answer to the underlying
question, are we going to move
“beyond GDP”? is a resounding “yes.”
Diane Coyle

Riaz Haq said...

True, India's economic growth in the last 25 years has been slower than China's. India's growth rose to almost 11 percent of U.S. gross domestic product in 2014 from about 4 percent in 1990, while China’s vaulted to 60 percent from 9 percent in the same period. But unlike China, India never became an export-driven manufacturing juggernaut and so its growth has been steadier. Last year it was 7.5 percent.

India's Aspirations

India also didn't benefit as much as China when manufacturing shifted from the West to developing countries, and thus the decline in offshoring is hurting India less than China.

India certainly has its problems -- notoriously slow bureaucracies, a lack of good infrastructure, and too much regulation and corruption to name a few -- that need to be addressed before economic growth can explode. Modi has sought reforms for many of these issues, though with limited success so far.

Reliable data measuring India's economy are fuzzy, to say the least. Most businesses are tiny and unregulated; many people are employed off the books. India also uses wholesale, not final, prices to deflate nominal GDP. Due to lower oil prices, the wholesale price index has been falling for 17 straight months while retail prices are still rising at a 5 percent annual rate. So the reported real GDP numbers are overstated.

Still, India has major advantages over China. China's one-child policy, while now relaxed, will result in fewer entrants into the labor force for decades. That could choke growth: Younger people tend to be more geographically mobile and flexible in terms of occupation and ability to learn new skills.

By contrast, India has had few constraints on population growth. The dependency ratio -- the number of children and seniors relative to the working-age population -- will continue to fall in India as it rises in China. As of 2015, India had 1.25 billion people versus China’s 1.37 billion. It won't be long before India's population is bigger.

Say what you want about colonialism, but British control of India for centuries left a vigorous democracy and a parliamentary form of government, which is useful for running a large, diverse country.

The British also left India with a railway system that facilitates the movement of people and goods over a vast geography. By contrast, China is reluctant to grant resident status to farmers who move to urban areas in search of work.

And of course the British gave India the English language -- useful in a world that conducts most business in English and as a unifying force in a country with hundreds of languages and dialects. India also inherited a free press and a legal system from the U.K. As a result, India's rule of law is vastly better than the Communist party-dominated courts of China, complete with show trials and forgone convictions.

Riaz Haq said...

#Indian CSO estimates overstate #GDP, Use Wholesale price deflator, not retail price deflator #Modi #GDP #India #GDP

Gap in methodology arose from the use of smaller-than-appropriate weights for CPI

The Central Statistics Office’s GDP figures released on Tuesday overstates the extent of growth, according to analysts. A number of statistical deficiencies plague the data, they said. The main issue is that not all of the growth that the figures show is on account of real growth. Much of it is purely on account of the increase in prices, which ought to have been deflated out adequately. According to HSBC Global Research the gap in the methodology arose from the use of smaller-than-appropriate weights for consumer price inflation in the GDP deflators. It found that correcting the consumer- and wholesale-prices mix in the deflators, giving them equal weights, suggests India’s Gross Value Added (GVA) grew 6.2 per cent in the January-March quarter, slower than the official estimate of 7.4 per cent.

“Price changes that boost nominal earnings are being ascribed to real growth,” JP Morgan Research wrote in a note to clients. “Much of the value-added is because of input prices falling more than output prices (i.e., nominal margins being boosted), which needs to be deflated out.” The faulty approach can be seen in the manner manufacturing value-added was deflated.

Input prices
Input prices are falling more than output prices, boosting the nominal margins, and inflating much of the value-added in the manufacturing sector. In the absence of adequate deflation, manufacturing growth was exaggerated, wrote HSBC Global Research.

CSO data put real manufacturing growth at 9.3 per cent in the January-March period. This was at odds with the IIP data for the same quarter, which showed a mere increase of 0.2 per cent, JP Morgan wrote. Similarly, inadequate deflation also affected the way tax changes were incorporated into the GDP data. It led to overestimation of taxes, which drove the GDP well above the GVA. GDP is calculated as a sum of GVA and indirect taxes from which the value of product subsidies is deducted. The difference in the GDP and GVA growth estimates is striking; it widened to 0.4 per cent from 0.1 per cent in the previous financial year. Separately, data show that contraction in exports is slowing, according to HSBC.

Riaz Haq said...

#India's #RBI chief Raghuram Rajan to leave, punished for questioning #Modi's fudged GDP figures … via @scroll_in

Raghuram Rajan will not be the governor of the Reserve Bank of India after September. That's not idle speculation inspired by Bharatiya Janata Party leader Subramanian Swamy's campaign calling for him to leave. It has been announced by Rajan himself in a letter to his colleagues at the central bank which the RBI published on Saturday. The internationally renowned economist wrote that he will be returning to academia after the end of his tenure as governor on September 4.

This ends months of speculation over whether Rajan, a United Progressive Alliance appointee, would see his tenure extended after his three-year term ends. Swamy was at the head of a public, often nasty campaign calling for Rajan to be sacked because he is not "mentally fully Indian." Swamy claimed that there were many others in the BJP who agreed with him.

The campaign prompted plenty of pushback from others, particularly economists who have lauded Rajan for his efforts in helping stabilise the Indian economy over the past few years. Many also suggested that not extending Rajan's tenure would have a detrimental effect on India's image with the business community abroad. The Economic Times' Swaminathan Aiyar even said that Rajan leaving would see billions of dollars in investment also follow him out of the country.

There were murmurs also that many in the establishment did not want Rajan to continue, in part because of his insistence on hawkish monetary policy that focused more on controlling inflation than cutting interest rates to make credit cheaper for industry.

The other reason why the government wanted him to go: Rajan's celebrity status, at home and abroad, meant he was one of the few people who could publicly criticise the government's policy. Most prominently, just as the government was touting India's status as the fastest growing major economy in the world, Rajan brought up the old phrase, "in the land of the blind, the one-eyed man is king."

Swamy's campaign might have embarrassed the government, prompting the Prime Minister to say that the media shouldn't discuss these things and Finance Minister Arun Jaitley to criticise the personal attacks. But it hasn't stopped the government from asking him to leave.

Rajan says as much in his letter to his colleagues at the central bank.

As he wrote, Rajan was "open" to seeing the developments through, but the government was not on the same page. Discussions between the finance ministry and Rajan before the last monetary policy statement, where the central banker chose not to cut rates, did not go well.

As a result, come September, Rajan will be back at the University of Chicago and India will have a new RBI governor. Significantly, however, Rajan's final monetary policy statement is also likely to be the last one put out solely by an RBI governor: His tenure saw the signing of monetary policy agreements between the central bank and the government agreeing to inflation targeting as the primary aim of the RBI, as well as the setting up of a monetary policy committee – including government appointees with no RBI veto – that will set the interest rate.

Whatever the view of his tenure as central banker, and there will be many over the coming days including the Sensex's verdict on Monday morning (which is probably why the decision was announced on the weekend), he will have left the RBI in a very different place than where the institution was before him.

Riaz Haq said...

Indian new report:

Raising doubts over the new GDP growth rate methodology, RBI Governor Raghuram Rajan on Thursday said there is a need for better computation of numbers so as to avoid overlaps and capture the net gains to the economy.

we need to be careful sometimes just talking about growth," Rajan told the students of the RBI-promoted Indira Gandhi Institute of Development Research.

In his convocation address, citing the example of two mothers who babysit each other's kids, he said there is a rise in economic activity as each pays the other, but the net effect on the economy is questionable.

"We have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas. It is important that when they move into newer areas, they are doing something which is adding value. We do lose some, we gain some and what is the net, let us be
careful about how we count that," he said.

The academic-turned-central banker further said that there are many suggestions from various quarters on the ways to calculate GDP in a better way and we should take those seriously.

Some analysts have questioned the new GDP computation methodology, which has been in effect for a year. The critics point to the divergence in the mood between GDP data and other indicators like factory output to question the veracity of the new series.

Riaz Haq said...

"#India's Growing At 5-6%, Less Than #Modi Government Claims" "#Pakistan's prospects bright" Morgan Stanley's Sharma … via @HuffPostIndia

Sharma says: "I think India is growing at a pace between 5 and 6%, or about two points lower than the government claims. That is a huge difference -- but these days a pace better than 5% is actually quite good, even for a relatively lower income country. At a time when slower population growth, high debts, falling growth in global trade and capital flows, and other forces are slowing the global economy, every class of nations needs to lower its expectations. It may be a long time before we see another emerging nation post growth in excess of 7-8% in this new era. The risk for India is that the state will try to push growth faster than is possible or practical, in this slow growth era"

"Sri Lanka, Pakistan and Bangladesh all have bright prospects going forward, with credit growth under control, strong working-age population growth, inflation in check..."

Riaz Haq said...

Bromance aside, #Obama regime doesn’t really think much of #Modi’s performance or #India’s GDP figures via @qzindia

Narendra Modi’s “friendship” with US President Barack Obama doesn’t appear to be going in the direction that the Indian prime minister would like.
The American government has become the latest critic of the Modi government’s failure to deliver on its promises and raised doubts about the country’s estimates of its economic growth. The Indian government has been “slow to propose other economic reforms that would match its rhetoric, and many of the reforms it did propose have struggled to pass through parliament,” Washington noted in its Investment Climate Statements for 2016.
The Investment Climate Statements, prepared annually by US embassies and diplomatic missions, provide information on investment laws and practices in each region, specifically to aid American investors in their investment decisions.

Modi’s victory in 2014 was a turning point for investor sentiment in India. He had come to power with a complete majority, so most observers assumed his government would be able to implement reforms more smoothly. That hasn’t been the case. The Indian Parliament has failed to pass some key reforms, the US government said, citing examples of the land acquisition bill and the goods and services tax (GST) bill.

“This has resulted in many investors retreating slightly from their once forward-leaning support of the BJP-led government,” the report said.
In August 2015, opposition parties in the Indian parliament managed to stop a refurbished and contentious land acquisition bill that Modi and his government backed. This was a major setback for the “Make in India” campaign as acquiring land for factories continues to be a complex and painful procedure in the country. Projects worth Rs53,000 crore ($9 billion) are stuck due to land acquisition problems in India, according to some estimates.
The government is still negotiating details about GST with opposition parties. GST aims to streamline India’s convoluted tax structure and is likely to provide an immediate boost to the country’s GDP.
“Overstated” growth

Given that several key reforms are yet to be implemented, the country’s claim as the fastest growing economy in the world may not be correct, the US government said. “Ostensibly, India is one of the fastest growing countries in the world, but this depressed investor sentiment suggests the approximately 7.5% growth rate may be overstated,” the report said.

The US isn’t first to doubt India’s GDP growth data. Many economists—and even the country’s central bank—have in the past voiced concerns over the new method of calculation that instantly increased the country’s GDP growth from 4.7% to 6.9% for the 2013-14 fiscal year.
The on-ground situation in India also indicates that all isn’t well. For instance, the pace of manufacturing growth is slow, private investments are yet to pick up, job creation is tepid and exports need a boost.
Socio-economic challenges

The report also warned potential investors of India’s sluggish legal system and complex business environment.
“Although India prides itself on its rule of law, the country ranks 178 out of 189 in the World Bank’s Ease of Doing Business Report in the category of enforcing contracts,” it said. “Its courts have cases backlogged for years, and by some accounts more than 30 million cases could be pending at various levels of the judiciary.”
Each of India’s 29 states and seven union territories has unique tax structures, labour laws, education levels and quality of governance, which means “investors must be prepared to face varied political and economic conditions,” the report said.