Making Sense Of India’s GDP Data Amid Its Many Revisions

One of the oft-repeated quotable quotes from former Reserve Bank of India governor YV Reddy is this: “Everywhere in the world the future is uncertain. In India, the past too is uncertain."

That comment is what first comes to mind when you try and make sense of India’s gross domestic product data released on Friday. The data showed GDP growth at 4.7 percent in the third quarter of FY20. Ok, that was in line with the consensus estimate, you say. But no. That 4.7 percent was supposed to be an improvement over the 4.5 percent growth in the second quarter of FY20. Instead, second quarter growth was revised up to 5.1 percent due to downward revisions to the FY19 data.

So what you got was a growth rate in line with consensus forecast but against the consensus narrative that the economy had bottomed out.

Confused? If you are, then read to try and make sense of what India’s GDP data is telling us about the state of the economy.

When Did The Economy Start Weakening?

Let’s first try and judge when the slowdown started. Here, the initial reading and the revised readings send out similar messages but to varying degrees.

The Indian economy has indeed been slowing since FY17, when growth was above 8 percent. The initial and revised estimates show significant weakness in both FY18 and FY19. While the initial estimates suggested that a bulk of the weakness came in FY18, the revised estimates suggest that both FY18 and FY19 were years in which growth slowed sharply.

The slowdown continued in FY20 with growth estimated to settle at 5 percent as per both the initial and the revised estimates.

Why Did The Economy Weaken?

The next question is what led to the weakness in the Indian economy. Determining that may help us understand the underlying causes of the slowdown.

• In FY18, there was a significant drag from net exports, with import growth well above export growth.
• The same year also saw a step down in consumption growth from 8.1 percent to 7 percent.
• Investment growth also weakened with gross fixed capital formation growth coming down from 8.5 percent to 7.2 percent.
• Sectorally, the steepest slowdown was seen in manufacturing, mining and in agriculture.

What was going on? Economists back then had pointed to supply disruptions caused by GST, which had led to a surge in imports. They had also pointed to weakness in manufacturing for the same reason. They had also noted that a hit to the informal economy due to demonetisation and GST will hurt consumption. That did appear to have happened.

Now let’s move on to FY19 and what the revised data suggests happened last year.

• FY19 expenditure side data throws up confusing trends. There was a slight pick-up in consumption growth, a revival in investment and some slowdown in government spending growth. Net exports were less of a drag.
• There was a sharp change in the growth rate for the “change in stocks” category. This category had surged in FY18, perhaps due to restocking post GST. In FY19, growth slowed.
• Among crucial sectors, mining contracted in FY19, perhaps hit by the Supreme Court ban on mining in Goa in February 2018.
• Agriculture slowed sharply. Manufacturing slowed marginally. Construction held steady, as did the financial services segment.

The narrative that emerges is contrary to the view that the collapse of Infrastructure Leasing and Financial Services Ltd. led to a sharp reduction in flow of financing to the economy, consequently slowing growth in the real economy.

What Happened In FY20?

Now lets come to the current fiscal year. The sharp revision in FY19 annual GDP growth from 6.8 percent to 6.1 percent has meant revisions to quarterly data for last year. This, in turn, has meant revisions to first and second quarter data for the current year as well.

• The most significant change in the current financial has been the drop in consumption growth from 7 percent in the last quarter of FY19 to 5 percent in the first quarter of the current year. There has been some pick-up in consumption growth in subsequent quarters.
• The other material change is the contraction in investment for two consecutive quarters in Q2 and Q3.
• Among key sectors, manufacturing contracted and construction stagnated. Growth in the financial services segment slowed but remained close to 7 percent.

Taken together, the view that India is facing weak consumer demand, which is hurting manufacturers and leading to a further slowdown in investment continues to hold. What doesn’t hold is the belief that the economy is seeing green shoots. The revised GDP data shows no signs of this, despite 135 basis points in interest rate cuts and some support from government policies such as front-loading of bank capitalisation and corporate tax cuts.

So, Then Growth Is Still Slowing?

Yes, after all that number crunching, the eventual conclusion is that growth is still slowing. That’s what economists seem to conclude as well. Here’s a sampling of early views from economists, which brings little good news.

Sonal Varma, Nomura

“Although Q3 FY20 GDP growth at the absolute level was higher than our expectation, the sharp upward revision in the previous prints confirmed our conviction that growth has in fact slowed in Q3 and that Q2 was not the bottom that the market expected. In our view, the slowdown partly reflects weak global growth, but is mainly symptomatic of the triple balance sheet conundrum (of banks, corporates and shadow banks), which has led to a credit crunch for ‘have-not’ sectors and entities, and complicated the deleveraging cycle. We expect growth to slowdown again in Q4.”

Rahul Bajoria, Barclays

“ While we believe the economy will continue to improve gradually going forward, the growth revival is likely to be slow. The recovery in the services sector remains lacklustre, as credit growth remains tepid and automobile sales are weak, even as freight and passenger traffic improve. The Union budget announced last month did not contain any major demand stimulatory measures. In addition, we think the absence of a material recovery in domestic demand, subdued investment and a fading of fiscal support will combine to keep growth soft. We continue to expect growth to average 5.3% in FY19-20 (RBI’s forecast: 5.0%) and pick-up to 6.5% in FY20-21 (RBI: 6.0%).”

Watch | SBI’s Soumya Kanti Ghosh and Bandhan Bank’s Siddhartha Sanyal on the GDP data.