Indias Growth Story Intact: Interpreting macro numbers and trends the right way

#1
There has been a lot of debate about Indias growth story coming to an end, with many top brokerages like Morgan Stanley and Goldman Sachs cutting GDP forecasts to sub 6% levels. However, my analysis shows Indias growth story is not only intact, it continues on a robust path.

The gloom-and-doom scenarios being painted today are an exact repeat of the phenomenon that happened during 2008-09 when the debate started that Indias growth story might be over and the Morgan Stanleys and Goldman Sachses of the world cut the GDP forecast for FY10 to sub 6% levels and some to even sub 5% levels.

What happened next?

In FY10, India posted a GDP growth rate of nearly 8%!

So what went wrong with all the doomsday scenarios for India? Two things went wrong.

First, an undue importance was placed on year-over-year (YoY) growth rates without looking at the trend in absolute GDP. Thats a simple number interpretation issue. A case in point is all the gloom surrounding the sub 6% YoY growth rates posted in the last two quarters of fiscal 2008-09 and the latest 5.3% YoY growth posted for the March 2012 quarter.

Second, not looking at the long-term trend and the impact of business cycles. Thats an economic analysis issue. Take a look at the chart below. I have compared the trend in absolute values of India GDP with that of U.S. GDP since 2005. I have compared just the India and U.S. trends in order to clearly explain how long-term growth rates and business cycles need to be interpreted. To facilitate a comparison, I have indexed the GDP values by initializing the starting values to 100.



As you can see, the chart speaks for itself. The trend in U.S. GDP is like a straight line, having grown only a total of 7% in the past six years. India GDP, on the other hand, is on a strong uptrend, having grown more than 80% in the same period. Within this long-term trend, the ups and down of a normal business cycle can clearly be seen.

Understanding long-term trends and business cycles, more often than not, does not need complex models. Most of the time simple charts and a bit of common sense work well enough. For those who would rather look at complex models, the RBI website is the right source, not brokerage research reports. There is some fantastic analysis available on the RBI site, the summary of which is that a growth rate in the 8% range is now the new normal.

Current Economic Problems: More imagined than real

The U.S. economy faces some structural issues, which are very real. Meanwhile, in India, the challenges to the long-term growth trend are more imagined than real.

The problems facing the Indian economy today are more tactical and cyclical rather than of a strategic or long-term nature. Its not as if everything is hunky dory no its not. There are challenges around fiscal deficit, current account deficits, governance and reforms. But all these challenges have pretty much existed for the past six years during which the economy continued to grow at a very healthy rate.

So, Is Indias Growth Story Intact?

As of now, yes.

As the chart clearly shows, the long-term trend in India GDP is fully intact and issues like the slowdowns in 2008 and 2011 are simply the business cycle playing itself out.

So, is there nothing that can derail the growth story? Of course, there are many factors which can do so. But its only major structural changes that can derail Indias growth story, things like a significant fall in competitiveness in services exports, a rollback of reforms and such like. Not factors like dollar volatility, oil prices and minor variances in fiscal deficit.

India has continued to grow at a steady pace for six years, a period characterized by a slowdown in reforms, the Lehman meltdown, dollar volatility, high fiscal deficits, high food prices and what not. Factors like these have only caused the normal ups and downs of a business cycle in India, and I forecast that they would only cause normal business cycles going forward, too.

So, What Happens Next?

In the next phase of Indias business cycle, the continuing drop in commodity prices, oil prices and interest rates will speed up the recovery process. Corporate profitability, which has already improved significantly, would post some handsome growth numbers. All these would result in a continuing GDP uptrend.

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Related analysis

5.3% GDP: Numbers not being interpreted correctly; recovery is intact
GDP Downgrades: Be wary of research house estimates; Indias growth story intact
Party Time Again: Time to buy panic for the Sensex ride to 80,000
Hiring and Salaries Going Up: Wheres the slowdown?
Greece Paranoia: A blessing in disguise for India
IIP Shows Recovery, Not Contraction
Recovery Underway: Fears unfounded
Bull run intact, growth rate on a rise
 

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praveen taneja

Well-Known Member
#2
Ye to Indians ki Himmat hai jo abhi bhi grow kar raha hai koi aur country hoti to growth kab ki degrowth ho jaati corruption ke karan
 

Sunny1

Well-Known Member
#4
what you all wrote is about growth chart. what about key reasons because of which slowdown was predicted ?

what political scenario ? which is actual cause of slowdown prediction.

key things are being talked about are:

1. Infra ..... yes this is very critical for further development ...
problem: huge corruption. yes the corruption is so huge in infra that political parties keep fighting about .
Ex. Bangalore metro ...debate was to start mono or metro? both were supported by different parties ...reason corruption...which party gets how much.. since the it has more than 8 years and project is yet to complete price went from 4k crore to 12k crore

2. Power sector
india's power crisis is huge . and problems are infinite .
it cannot be solved easily.

there are many other hurdles which can hinder the growth . and no political party is interest to solve these problem is the main problem.

interference of US in India is another major problem

pressure is very high at High level. like at PM office.

conclusion.
economies and business. yes they are on right track
all slowdown prediction is based on political level nothing else.
 
#6
Pranab is right - growth story intact

Appreciate all the comments and I respect differences in opinions.

However based on all the detailed analysis, I continue to believe that India growth story is intact - so far at least.

Pranab Mukherjee has given statements in press saying that S&P report is not based on fresh rating action, and that there would be a turnaround in country’s growth prospects in coming months.

I believe him to be right, not because I respect him , which incidentally I don't, but simply because he is right.

My analysis shows that India growth story is intact and the gloom and doom scenarios being painted is due to inability of economist's and analyst’s to interpret numbers correctly, and an undue focus on business cycles at the cost of long term trend.

Interpreting numbers and macro trends the right way


Doesn't make a difference even if IIP posts negative YoY numbers for a few months more and GDP YoY remains in 5% range.

Keep in mind that IIP was posting negative YoY numbers during April - June 2009 even as the corporate profitability was improving and markets were making new highs.In fact, the IIP YoY % were posting very flattish trends till Oct 2009. During this same time periods Nifty more than doubled from 2500 levels to 5100 levels !

Refer my earlier analysis on how looking at YoY numbers is not always the right way to interpret macro trends. The right way to look at the GDP and IIP numbers is to simply look at a chart of absolute IIP and GDP over time. Furthermore, one has to differentiate between long term trend and short term business cycles.

Short term problems exist, but Long term trend intact


All macro indicators including absolute IIP, absolute GDP, corporate profitability, hirings, attritions, salary increases, job increases point to a the long term being intact. The problems facing the Indian economy today are more tactical and cyclical rather than of a strategic or long-term nature. It’s not as if everything is hunky dory – no it’s not. There are challenges around fiscal deficit, current account deficits, governance and reforms. But all these challenges have pretty much existed for the past six years during which the economy continued to grow at a very healthy rate

Be Way of S&P, Morgans and Goldmans of the world

As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded India sovereign rating just three months before the markets did an upward breakout and growth numbers turned around !

The gloom-and-doom scenarios being painted today are an exact repeat of the phenomenon that happened during 2008-09 when the debate started that India’s growth story might be over and the Morgan Stanleys and Goldman Sachses of the world cut the GDP forecast for FY10 to sub 6% levels and some to even sub 5% levels.

What happened next?

In FY10, India posted a GDP growth rate of nearly 8%!

Growth story intact, notwithstanding government inaction


India’s growth story is intact, no thanks to the current government, but a tribute to a basic resilience and the underlying growth momentum of Indian economy itself.

India growth story is intact, not because of government action, but notwithstanding government inaction !


Related analysis

• Be wary of S&P ratings
• India’s Growth Story Intact: Interpreting macro numbers and trends the right way
• 5.3% GDP: Numbers not being interpreted correctly; recovery is intact
• GDP Downgrades: Be wary of research house estimates; India’s growth story intact
• Party Time Again: Time to buy panic for the Sensex ride to 80,000
• Hiring and Salaries Going Up: Where’s the slowdown?
• Greece Paranoia: A blessing in disguise for India
• IIP Shows Recovery, Not Contraction
• Recovery Underway: Fears unfounded

Amar Harolikar
Unknown Insights
 
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Sunny1

Well-Known Member
#7
Yes no doubt growth is intact.

but problem is lot of people...
connect the growth with rise and fall in stock market.
india growing....stock falling ...hmmmm growth must be wrong...
growth slowing....stock rising ..hmmm growth must be wrong...

they do not understand cycle in stock market economy ...both
tv and media ...pretends to be know all...starts giving various reasons to satisfy most foolish mind.

Time to see how India solve hurdles...
As Trade Dont forget to take advantage of it .
 

Creep

Active Member
#8
My cousin runs a hero honda showroom and a friend runs Suzuki showroom, they say if you want to know the real state of the economy, 2 wheeler sales are a good indication..Was speaking to them over a drink and they seemed to have bad news... Suzuki is almost dead and hero honda for the first time in the last few years is showing some real slowdown.. The same is the case with bajaj.. This is not because there are more showrooms or whatever, general demand is dropping... Don't go by the numbers what companies release, a lot of it is botched... There is some danger around the corner for our economy it feels.. Market may have priced it in, but still time to be careful...
 
#9
Interpreting IIP numbers the right way

Indias growth story is very much intact so far, even as IIP has posted 0.1% YoY growth. It wont make a difference even if IIP posts negative YoY numbers for a few more months.

Refer to my earlier analysis regarding the way looking at YoY numbers is not always the right way to interpret macro trends. The right way to look at the GDP and IIP numbers is to simply look at a chart of absolute IIP and GDP over time. Furthermore, one has to differentiate between a long term trend short term business cycles.

Take a look at the chart below of IIP numbers for the past seven years along with a 12 month moving average. As can be seen from the chart, the long term uptrend is intact, and is comprised of many ups and downs as part of regular business cycles.

Keep in mind that IIP was posting negative YoY numbers during April - June 2009 even as corporate profitability was improving and markets were making new highs. In fact, the IIP YoY % were posting very flattish trends until Oct 2009. During this same time period Nifty more than doubled from 2500 levels to 5100 levels!

As for S&P, as per my previous story, one has to be wary of their reports and ratings. In 2009 they had downgraded Indias sovereign rating just three months before the markets did an upward breakout and growth numbers turned around!


Amar Harolikar
Unknown Insights
 

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