BackThe secret behind India’s world-beating economic growth
To understand how India became the world's fastest-growing major economy, investors should look at smaller unlisted companies
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New Delhi: To understand how India became the world’s fastest-growing major economy, investors should look at smaller unlisted companies like Samta Khanna’s VNS Accessories Pvt.
Khanna estimates that revenues from her 125-employee handbag business increased 25% in the year through March even though production was the same—largely because she charged more for innovative designs.
Under India’s old method of calculating gross domestic product (GDP), which focused on measuring quantity, this would’ve been recorded as zero growth. The government’s new calculation instead considers the increased value of the goods.
What’s more, statisticians now count hundreds of thousands of smaller companies like VNS Accessories. Previous numbers were based on a sample survey of a few thousand businesses.
The formula change prompted India’s annual growth to rise to about 7% virtually overnight from a near-decade low of 5%. Economists predict India’s GDP expanded 7.4% in the three months through June, which would be faster than a slowing China. The number will be released on Monday.
“The data is clear that production growth has been weak," said Pronab Sen, former head of the Central Statistical Office. “What has increased much faster is the income growth."
The credibility of India’s GDP numbers is important for the central bank to gauge the strength of the economy as it sets monetary policy. It’s also essential for investors who fled India and other emerging markets this week, in part on concerns that China may be slowing more than anticipated.
Headline numbers showing a strong economy contrast with underlying indicators such as shrinking exports, sluggish lending and a tepid recovery in profits of India’s 30 largest companies after a record drop in January-March.
India’s central bank hasn’t yet published a GDP forecast under the new method. Reserve Bank of India (RBI) governor Raghuram Rajan said on Monday that the country’s economic growth is still below potential.
India’s fundamentals are still strong, finance minister Arun Jaitley told reporters in New Delhi on Tuesday, a day after the S&P BSE Sensex index had fallen the most since 2009. The benchmark is down 3.1% this week.
India’s GDP data shows that smaller companies have seen revenue grow at nearly twice the pace of larger listed firms, according to Ashish Kumar, director general of the Central Statistics Office.
Companies with paid up capital of less than ₹ 5 crore grew 14.4% in the year ended March 2014, compared with 8.2% among bigger publicly traded businesses, Kumar said.
‘Discredited’ practice
Critics of the new method say that shell companies might be distorting the data. Of the more than 900,000 companies listed on the government’s database, only 520,000 filed audited returns in 2012-13. That fell to 300,000 companies the following year.
Statisticians use those returns to extrapolate total revenue for the entire pool. The problem is that nobody knows how many companies only exist on paper, a common practice in India for fundraising or avoiding taxes.
This “discredited" practice probably resulted in inaccuracies, said R. Nagaraj, a professor at the Indira Gandhi Institute of Development Research in Mumbai, who’s advised the Statistics Office on data collection.
“Whether the new estimates are ‘better estimates’ or ‘overestimates’ is the crux of the matter," he said. “I remain skeptical."
Under the new method, India’s GDP grew 7.4% in April-June, according to the median of 15 estimates in a Bloomberg survey. That’s would be the fastest pace among major economies.
Despite the skepticism, the overarching methodology is in line with internationally accepted practices, and economists have little choice but to adjust.
“There is a discrepancy between high frequency indicators and the GDP numbers, but this can happen at times of change," said Atsi Sheth, senior vice president for sovereign risk at Moody’s Investors Service. “We take these numbers at face value." Bloomberg
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