Data in disguise: Interpretation requires a discerning approach

Three upcoming data points need to be interpreted very carefully for a correct reading of the current state of India's economy

- PRANJUL BHANDARI

Three economic data points which are likely to be released over the next few weeks should not be taken at face value. There are several nuances around them which need to be carefully interpreted to get an accurate sense of the state of the Indian economy. They are as follows:

GDP growth-too good to be true?: Gross domestic product (GDP) for the April-June quarter will be out on 31 August. We're expecting a strong print of about 8% year-on-year growth (versus 6.1% last quarter). But we caution that growth on the ground, though impressive, is not as high, and the number may have to be taken with a pinch of salt.

To be fair, some of the increase in growth is real. The 25-75% fall in commodity prices over a year has led to improved corporate margins, consumer purchasing power and strong public capital expenditure. But even all that may not be good enough to result in 8% growth. Three statistical issues are likely at play.

One, sticky base effects could overstate growth. The first quarter (QI) was especially weak over the last few years due to the pandemic, so this may make GDP look particularly high.

Two, the Indian Statistics Office uses a single deflation methodology to calculate GDP instead of double deflation (which uses two different deflators for output and input), leading to an overestimation of growth in periods when commodity prices are falling. But how much will it exaggerate growth this time?

In fiscal 2015-16, we estimated that a $40/barrel fall in oil prices led to manufacturing growth being exaggerated by 4.5 percentage points (ppt). This time around, oil prices have fallen by $20/barrel, which could lead to a 2.5ppt exaggeration in manufacturing growth and a 0.33ppt exaggeration in headline GDP growth.