Q4 AND FY15 GDP - ONUS BACK ON RBI TO SPUR GROWTH
By Ruma Dubey
Today’s Gross Domestic Product (GDP) data was relevant for two reasons – firstly, it will be very important for the RBI Governor who may or may not announce a rate cut on 2nd June. Secondly, this is the first set of GDP data which is based on the new method.
In fact advance estimates for FY15 released in Feb, put the GDP growth at 7.4% - making it the fastest growing economy, surpassing even China. And surpass China we have!
Q4FY15 growth was at a whopping 7.5% and FY15 GDP was at 7.3% v/s 6.9% in FY14. Wow! But the Q3FY15 GDP was revised downwards to 6.6% from 7.5% though Q1 and Q2 were revised upwards.
This change in the GDP is obviously on account of the change in base year and methodology. So the question which we are asking – is this new formula really reflecting the true face of the economy? There is no doubt that the economy is weak; IIP numbers, tax collections, falling exports for past five months, corporate earnings and even the day-to-day reality we see around us says so. Yet, our economy’s growth is the fastest growing economy in the world?? This surely means that the world has slowed down drastically!
The Govt changed the base year – from 2004-05 to 2011-12. This change immediately affects the GDP estimates. The Central Statistics Office (CSO) which releases the second Revised Estimate for a financial year ending in March on the subsequent January 30 every year, this year too revised the FY14 GDP estimate. And based on this change, FY14 GDP growth, using 2011-12 as the base year was revised upwards from 4.7% to 6.9% and the FY13 GDP estimate was revised to 5.1% from 4.5%.
The change in methodology – it as per what the IMF has prescribed. Henceforth growth will be measured by gross value-added at basic prices unlike factor cost, which was the method used till now. In simple language what this means is that data is compiled on market or current prices and that makes all the difference. These changes, especially because of use of market prices, will necessarily mean that we will get higher GDP growth estimates.
Well, if 7.5% for Q4FY15 is the growth rate, what is the need then for the RBI for a rate cut? Isn’t that then the logical argument? Rate cuts are needed to spur the economy on the growth track but if we are already growing and that too more than 7%, RBI might not see the need to cut rates now. It would rather keep a watchful eye on the inflation, which is as such raising its ugly head.
Even if RBI does cut rates, it could be at the most by 0.25 bps, which is what majority of analysts are expecting. But the market has already discounted this rate cut and moved on. This in turn means that the market will not pay much heed, to neither this data on Monday nor a 0.25 bps rate cut on Tuesday.
To conclude, we are showing some signs of recovery, we are moving out of the bottom of the recovery cycle and all depends on how the consumption picks up in the coming months – this will be key to our transition to a phase of sustained growth. More than RBI, unless Govt spurs public investment in infrastructure, we could continue to juggle growth numbers by merely changing methods, far from the actual reality. And remember mere rate cuts are not enough - unless people start buying, these cuts remain meaningless. Sentiments are tepid now and the Govt needs to ensure this does not turn negative....