India forecast its economy will accelerate 7.4 per cent this financial year, data showed last Monday (9), under a revised formula for calculating gross domestic product that has baffled analysts since its release last month.
The economy will grow 7.4 per cent in the year through to March, the statistics ministry announced, after earlier revising the forecast expansion to 6.9 per cent from 4.7 per cent by using the new formula.
Asia’s third-largest economy also grew at an annualised 7.5 per cent in the three months to December, statistics official Ashish Kumar said at a press conference, racing past China’s 7.3 per cent growth in the same period.
India was thought to be struggling through its worst economic slowdown since the 1980s with growth below five per cent – far too low to generate enough jobs for millions of young people.
But the new formula – which changes the way gross domestic product (GDP) is calculated and that officials say is closer to international standards – shows the economy has in fact been expanding fast.
The main shift is that India now measures its economic growth at market prices to incorporate ‘gross value addition’ in goods and services as well as indirect taxes. The base year to calculate India’s GDP has also been advanced to 2011-12 from 2004-05.
“These numbers are much better than initially expected. They definitely come as a surprise and we are in the process of trying to understand them,” said DK Joshi, chief economist at local ratings agency CRISIL. “The figures make India neck and neck with China.”
Uncertainty surrounding the new data comes as finance minister Arun Jaitley is set to unveil the national budget on February 28.
A faster growing economy also risks stoking inflation, which the government and India’s central bank have been desperately wrestling to bring under control.
Arvind Subramanian, the finance ministry’s top economic adviser, said this month he was “puzzled” by the earlier revised GDP numbers.
“I am puzzled by the GDP growth numbers and, consequently, all the constituent elements that went into constructing it,” Subramanian said. “We have to be very careful in using these numbers for policy-making.”
As a search is on for reliable indicators of underlying activity, one senior finance ministry official said: “Let’s not get carried away – the ground reality is very different.”
Stalled projects and stretched capacity in the power, infrastructure and housing sectors are having knock-on effects down the supply chain to small-and-medium-sized enterprises (SMEs), said Anil Bhardwaj, secretary general of the Federation of Indian Micro and Small and Medium Enterprises.
“This is a bit perplexing. The feedback we are getting on the ground is not as positive. SMEs are not getting the orders,” Bhardwaj said.
“There is an improvement in business sentiment, in the environment, but unfortunately there is no movement on the ground.”
Larsen and Toubro, an industrial group regarded as a bellwether for the wider economy, lowered its order book estimates on Monday and said a recovery in its domestic business was at least a year away.
“India Inc, while it continues to be aspiring, is still on the wait and watch mode,” chief financial officer R Shankar Raman told reporters.
The 2015/16 budget that Jaitley will unveil next Saturday (28) will be based on an expectation that the economy would grow at the roaring pace of eight per cent or more, one source familiar with the matter said. Yet revenues will lag.
“Everyone is happy that India’s GDP growth has picked up, but we are worried over slower growth in tax collections,” the source said.
Indirect tax receipts, which include customs and factory gate duties as well as levies on services, have risen by just 6.7 per cent so far in this fiscal year against a budget estimate of 26 per cent for the full year.
A weak tax take also points to fragile consumer demand. Although a plunge in global oil prices has cooled inflation, that has yet to encourage Indian consumers to buy TVs, cars or appliances.
Households are still not confident of any quick turnaround in their fortunes, according to a monthly survey by ZyFin Research. Weak demand has hobbled New Delhi’s efforts to revive sluggish auto sales with tax breaks, leading car makers to scale back sales forecasts.