The return of puzzling GDP numbers

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Differing accounting practices employed by the govt and FCI, astatine a clip erstwhile past years’ subsidy arrears are being paid, could beryllium distorting GDP estimates

Furthermore, a antagonistic  maturation  clip successful  Q4 does not beryllium   good   with the precocious   frequence  indicators, which proceed  to tick higher.Furthermore, a antagonistic maturation clip successful Q4 does not beryllium good with the precocious frequence indicators, which proceed to tick higher.

By Pranjul Bhandari, Aayushi Chaudhary & Priya Mehrishi

A puzzle of sorts has arisen (again) successful India’s GDP estimates. The statistic bureau is estimating that aft expanding 0.4% yoy successful Q3, maturation volition spell backmost into contraction mode successful Q4, contracting 1.1% yoy.

This should person implications for investors, who are broadly expecting that India is retired of the woods and volition turn positively implicit the adjacent fewer quarters. Furthermore, a antagonistic maturation clip successful Q4 does not beryllium good with the precocious frequence indicators, which proceed to tick higher.

Further probe reveals that determination are immoderate methodological issues successful the calculation of growth, which are possibly not conscionable distorting existent maturation estimates, but could adjacent permission an imprint connected maturation information for the adjacent fewer years. It could adjacent person distorted maturation estimates successful the past fewer years.

1. Which information points alerted america to the problem?
Q3FY21 GDP came successful weaker than expected, but Q3 GVA was not arsenic weak. There was a amazingly crisp quality betwixt the 2 measures of maturation (0.4% GDP maturation versus 1% y-o-y GVA growth). Note that the quality betwixt GDP and GVA maturation is mostly lower, astatine 0.2ppt (10-year average).

This crisp quality besides extended to the FY21 full-year beforehand estimation of the statistic bureau (-8% GDP versus -6.5% GVA growth). Compared to the erstwhile beforehand estimation which was released successful January, GVA was revised up (to -6.5% versus -7% previously), but GDP was revised down (to -8% versus -7.8% previously).

Working retired the Q4FY21 estimation from the full-year 1 suggests that the statistic bureau expects GDP maturation to declaration 1.1%, but GVA to grow 2.5%. This got america confused. Is maturation ticking up, oregon sliding down?

2. What explains the divergence betwixt GDP and GVA?
We cognize that GDP = GVA + indirect taxes – subsidies. We besides cognize that indirect taxes grew sharply successful Q3 (GST grew +8% y-o-y; cardinal authorities indirect taxes grew 33% y-o-y). So, for GDP to turn astatine a overmuch slower gait than GVA, subsidies would person had to turn alternatively strongly. But wherefore would that be? Because the fund connected February 1, made it each excessively wide that implicit 2 years, the authorities intends to wage disconnected past unpaid dues to FCI, the intermediary for nutrient subsidies. To beryllium precise, the program is to wage 0.9% of GDP successful FY21 and 0.3% of GDP successful FY22. Repayment of immoderate of these resulted successful bloated subsidy growth, thereby depressing Q3, Q4 and FY21 maturation estimates.

3. But shouldn’t the GDP methodology person a mode to instrumentality attraction of this?
Yes, if each economical cause utilized the aforesaid accounting methodology. Let america explain. For simplicity sake, fto america enactment with 2 economical agents—the FCI and the cardinal government. If some did “accrual accounting”, we would not person a problem. The FCI would relationship for subsidies successful the twelvemonth they accrued, and the authorities would relationship for them successful the aforesaid twelvemonth too. In this situation, GDP would beryllium a amended indicator of underlying growth, alternatively than GVA (because it strips disconnected the subsidy payments, which thin to inflate GVA).

The occupation arises erstwhile the FCI and the authorities travel antithetic accounting practices—for instance, if the FCI does “accrual accounting” portion the authorities does “cash accounting”. In this case, determination could beryllium a problem, for instance, if the subsidies successful FCI’s books accrued (say) past year, but the authorities lone paid up successful the existent year. To get astatine the GDP number, the statistic bureau would extremity up subtracting from existent GVA much subsidies than what accrues successful the existent year. This could pb to an underestimation.

And, indeed, this is what we deliberation is going on. The FCI has clarified successful its accounts manual that “all expenses are accounted for connected an accrual basis.” It has gone connected to explicate that “income is recognized erstwhile determination is tenable assurance for its realisation and is earned (usually erstwhile goods are transferred oregon services rendered), nary substance erstwhile currency is received.” On the different hand, we cognize that the Indian authorities records expenditures connected a currency basis.

4. Were previous-year maturation numbers impacted too?
Yes, likely. If we are close with our investigation truthful far, determination is simply a accidental that past numbers person been impacted too. The authorities has been owing wealth to the FCI implicit the past respective years, and the magnitude picked up rapidly from FY18.

Over those years, the FCI would person accounted for the subsidies successful its books and this would amusement up successful GVA. However, the authorities did not wage up connected time. As such, a smaller currency subsidy magnitude was deducted from GVA to get astatine GDP, thereby perchance overstating growth.

Indeed, we find that implicit FY18 and FY19, GDP maturation was 0.6ppt higher than GVA maturation (versus the 0.2ppt mean successful the erstwhile 5 years). True, immoderate of it could beryllium due to the fact that of different factors similar a autumn successful substance subsidies oregon a emergence successful indirect taxes; but, regardless, we deliberation this deserves investigation.

5. By however overmuch could aboriginal maturation numbers beryllium impacted?
The authorities plans to repay the dues for subsidies implicit the adjacent 2 years, FY21 and FY22. Its FY21 beforehand estimation for GDP maturation is -8%, little than the GVA beforehand estimation of -6.5%.

About fractional of the 1.5ppt wedge, by our calculation, is due to the fact that of the distortions created by the outgo of past subsidy dues, and does not bespeak existent weakness successful economical activity.

Moreover, it ends up inflating the GDP maturation fig successful FY22, due to the fact that of a debased statistical base. However, immoderate of the basal effects could beryllium offset by the equilibrium outgo of past subsidy dues (budgeted astatine 0.3% of GDP successful FY22), which could extremity up depressing GDP for the reasons explained.

We enactment each this retired cautiously and find that, connected net, the affirmative basal effect interaction overshadows the antagonistic outgo of subsidy dues impact, starring to GDP maturation being overstated by 1ppt successful FY22. Finally, the repayment of equilibrium dues successful FY22 could interaction FY23, again owed to debased basal effects. We cipher that GDP maturation whitethorn beryllium overestimated by 0.5ppt successful FY23.

6. What, then, is the ‘true’ economical maturation successful India?
In mean times, GDP is simply a much wholesome indicator of economical maturation than GVA, due to the fact that it includes the authorities arsenic well. But with GDP impacted by outgo of previous-year subsidy dues, we deliberation GVA volition amended bespeak economical growth, not conscionable successful FY21 but besides implicit FY22 and FY23.

7. What happens to HSBC maturation estimates?
As explained above, the quality successful accounting procedures by the FCI and the authorities whitethorn overstate GDP maturation successful FY22 and FY23. But it is besides imaginable that the statistic Office corrects this occupation implicit time. In the past, the statistic bureau has tried to amended its methodology, adjacent if it means making crisp changes to GDP history. We volition truthful hold and watch, astatine slightest until the adjacent GDP merchandise scheduled for May, erstwhile galore revisions thin to happen.

For now, we volition instrumentality to our antecedently published forecasts of -6.3% y-o-y GDP maturation successful FY21, 11.2% successful FY22, and 5.8% successful FY23, which we deliberation bespeak the ‘true’ maturation connected the ground.

Excerpted from HSBC Global Research, Economics India study (March 4)

Bhandari is main economist, Chaudhary is economist & Mehrishi an associate, HSBC Securities and Capital Markets (India)

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