Two Factors May Have Exaggerated Q1 GDP Growth, Says HSBC's Pranjul Bhandari
Adjusted for low base effects and deflator issues, GDP growth is likely to have been closer to 6%, Bhandari says.
While India's first-quarter GDP grew at the fastest pace in four quarters, statistical issues might have led to some exaggeration, according to economist Pranjul Bhandari.
Gross domestic product grew 7.8% in April–June, a step up from 6.1% in January–March, meeting economists' forecasts.
There is a problem in the manufacturing and services deflator. Bhandari, chief economist for India and Indonesia at HSBC, told BQ Prime in an interview, referring to the adjustment for inflation.
In the manufacturing deflator, the problem is that commodity prices fell in this quarter, she said. The Central Statistical Office does single deflation instead of double. Whenever that coincides with commodity prices falling, manufacturing growth gets exaggerated, she said.
Similarly, for services, the services deflator has too much goods in it, so when goods inflation is falling, services growth gets overstated, Bhandari said.
The GDP deflator, or implicit price deflator, is used to measure and adjust for inflation. From that perspective, WPI is important as it constitutes more than 60% of the weight, according to Bhandari. The moderation in WPI inflation indicates that the GDP deflator was low in Q1, she said.
The second problem is that of base effects. Since the pandemic days, there has been a low base effect, and that has exaggerated growth by one percentage point, she said.
If you add the manufacturing and services deflator problems, and the base effect problem, my sense is that GDP growth in Q1 FY24 was similar to the levels seen in the previous quarter—at around 6%.Pranjul Bhandari, Chief Economist-India and Indonesia, HSBC
As the base normalises, and rural demand comes under pressure led by the El Nino, we expect GDP growth prints to slow from hereon, averaging 5.8% in FY24, Bhandari said.
Edited Excerpts From An Interview:
With deficient rainfall in August, and rainfall for the full season likely to be below normal, what's the likely implication on rural demand and incomes?
Pranjul Bhandari: GDP growth will slow in the coming quarters. One of the reasons is statistical. Base effect will peter off and GDP growth will normalise. It just means that GDP growth will be a better indicator of the scenario on ground. Secondly, actual growth on ground will also weaken if El Nino intensifies in the coming months.
In past instances, we have also seen that when we have a big climate shock, food inflation does not rise very much as we become more efficient—supply-side measures, higher imports... What suffers instead is rural demand.
If El Nino intensifies, my sense is that rural growth could weaken, along with weaker on-ground growth.Pranjul Bhandari, Chief Economist-India & Indonesia, HSBC
What's the implication of weaker nominal growth?
Pranjul Bhandari: An important implication in a pre-election year is the fiscal implication. Tax revenues are lower than what was budgeted at the start of the year, but expenditure may remain high because of pre-election year pressures. That will be an area which will need focus. For instance, the Finance Ministry can slow capex a little, and make money available for social welfare schemes.
Your research indicates hint of a K-shaped recovery in tax data. Could you elaborate?
Pranjul Bhandari: Direct tax collections have weakened, whereas indirect tax collections remain strong. This, along with other data, is indicative of a K-shaped recovery.
GST rates are higher for luxury products. Demand for that continues to be strong. Also, revenue inflow from imported goods. High-end demand continues to be strong, while corporate tax collections are not doing as well. Despite improving profitability in companies, volume growth remains weak.
