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Business News/ Market / Mark-to-market/  Monetary policy: Ten takeaways for the Reserve Bank from the GDP data
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Monetary policy: Ten takeaways for the Reserve Bank from the GDP data

What RBI should make of the recently announced gross domestic product numbers ahead of its monetary policy review on Tuesday

Photo: BloombergPremium
Photo: Bloomberg

What should the Reserve Bank of India (RBI) make of the recently announced gross domestic product (GDP) numbers? Here are 10 key takeaways:

1) Inflation according to the GDP deflator, perhaps the most comprehensive measure of inflation in the economy, was a mere 0.2% in the March quarter. This extremely low level of inflation should be a powerful argument for a rate cut.

2) The gross value added (GVA) numbers show that at basic prices, we actually have deflation. While GVA at constant prices in the March quarter rose 6.1%, GVA at current prices gained at a slower 6%. This is not just a reflection of deflation in the Wholesale Price Index, but also of deflation in the services sector. The data show that in the March quarter, apart from massive deflation at the basic prices level for the mining sector, there was deflation for the construction sector, the trade, hotels, transport and communication and services sectors and the financial, insurance, real estate and professional services sectors as well. All this reinforces the argument for a rate cut.

3) GDP growth is up 7.5% in the March quarter, higher than the 6.6% in the December quarter. The economy is improving, according to this yardstick. But gross value added at basic prices is up 6.1% in the March quarter, compared with 6.8% in the December quarter. This measure shows the economy is decelerating. Which metric should RBI look at?

4) RBI should try to gauge the strength of domestic demand, especially consumption demand. The GDP data at constant prices show that private final consumption expenditure increased 7.9% in the March quarter, up from 4.2% in the December quarter. This indicates domestic demand has picked up sharply.

5) Investment demand is also picking up, with gross fixed capital formation growing at 4.1% in the March quarter, up from 2.4% in the December quarter. That raises the question: if both consumption and investment demand are rising, is there any need for a rate cut?

6) But here’s a fact. As much as 3.4% of the GDP at constant prices for the March quarter is accounted for by what the Central Statistics Office calls “discrepancies". What’s more, 24% of the growth in GDP for the quarter, compared with a year ago, is on account of the growth in “discrepancies". That doesn’t inspire much confidence in the data.

7) Here’s another fact. When the advance GDP estimates were released, in February this year, “discrepancies" for the December quarter, at constant prices, were estimated at 60,546 crore. These discrepancies for the December quarter are now estimated at 26,616 crore. In view of such huge revisions, it’s best perhaps to look at the supply-side data.

8) But the supply-side data show GVA growth slowed in the March quarter. Does that reinforce the argument for a rate cut? Not really. A rate cut is not going to increase the production of either agricultural goods or lead to more government spending. And it is the sluggishness in these sectors that pulled down GDP growth in the March quarter. Leaving out agriculture, forestry and fishing sectors and the public administration, defence and other services, we get a growth rate of 9.1% at constant prices in the March quarter for the non-farm, non-government services economy, compared with 7.1% in the December quarter. In other words, growth has accelerated in the manufacturing and non-governmental services sector. Why then the need for a rate cut?

9) The argument for a rate cut then is limited to the very low level of inflation seen from the GDP data.

10) One last point. While giving the advance GDP estimates for 2014-15 last February, the Central Statistics Office had implicitly assumed a growth in GVA at basic prices, at constant prices, of 7.8% for the March quarter. That has now been revised down to 6.1%. Such a wide divergence suggests that the new GDP series is still very much a work in progress.

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Published: 31 May 2015, 11:52 PM IST
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