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Business News/ Market / Stock-market-news/  Are GDP projections missing something?
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Are GDP projections missing something?

The up now, down again pattern in the performance of economic indicators seems to suggest so

The consensus view on industrial production, which expected a 2.5% growth for the month, couldn’t have had a wider miss. Photo: BloombergPremium
The consensus view on industrial production, which expected a 2.5% growth for the month, couldn’t have had a wider miss. Photo: Bloomberg

The industrial production data for October sprang a surprise as output contracted 4.2% year-on-year. The consensus view, which expected a 2.5% growth for the month, couldn’t have had a wider miss. Likewise, wholesale price inflation stagnated in November against which the consensus expectations were a 1-1.4% rise. Then, the November trade deficit was unanticipated too, surging to $16.9 billion from $13.3 billion the previous month. Most expected this to narrow down given the slide in oil prices. Considering the November trade deficit will push the October-December current account deficit projections beyond current expected region of below-1% of GDP, this macro variable is surprising too.

What then is going on with the much-sought after economic recovery?

Are forecasters missing something?

Of course, predictions are just forecasts. These can go wrong, even when done by official and international agencies. Nothing wrong in getting guesses wrong therefore. But what is happening for the past few months is that a bit of uplift in one economic indicator or another is a support for the trend-recovery story, while a dip is explained by one or another reason. However, a consistent picture still remains to emerge from the range of economic indicators so far this year.

Take the case of the October fall in Index of Industrial Production (IIP) as an example. Besides the usual complaints about the index’s volatility (that it still manages to move with most other economic cycle indicators like exports, credit growth etc. is often overlooked), there is the “base effect" reasoning. But statistical aberrations are known when projecting growth rates, including that of price indices. So can this explain the industrial output and inflation data surprises? Again, the Nokia plant closure is explained for bringing down the index some 70%, which is the negative contribution of the segment (radio, TV and communication equipment) where it belongs. If one factory shutdown indeed made such a huge difference, the effect should last for the next 12 months as base effects normally do.

The behaviour of imports is another case to be considered. The jump in gold and silver imports to $6.3 billion in November from $4.9 billion in October defies the sharp fall in inflation and consequent rise in real interest rates. We wonder if there is a relationship out there. This surge can’t be a shift from illicit to official gold imports either since the restrictions on gold imports were lifted in end-November. One would have to wait for December data before resolving this puzzle.

It is the non-oil, non-gold imports however that is more related to aggregate demand developments for which it is a conventional indicator of long times. These rose 26.2% year-on-year, and quite broadly distributed across most products, although some like fertilizers, coal, iron ore, cotton, paper pulp and pulses were exceptionally robust.

What remains a thorn in the flesh is the demand for bank credit; non-food credit growth was static at 11% year-on-year in October and November. This compares with 16.5% and 14.7% in corresponding months last year when growth was trending below 5%. Whether the non-oil, non-gold import represents a demand rebound or is driven by price changes (the rupee is overvalued in past few months for example) remains to be observed ahead. But the up- now, down-again pattern in the indicators of economic activity does make one think if current GDP forecasts for 2014-15 are missing something.

Renu Kohli is a New Delhi based macroeconomist.

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Published: 16 Dec 2014, 08:23 PM IST
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