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Bank of America Merrill Lynch Research Report -- India's GDP: In 6.9th Heaven!

Feb 02, 2015   19:43 IST 

Bottom line: Domestic story more resilient

The Indian government has revised FY14 growth up to 6.9% from 4.7% after improving corporate coverage on rebasing GDP to 2011-12 from 2004-05. Pronab Sen, Chairman, National Statistical Commission, has long maintained that the 2004- 05 GDP data was under-estimating industrial growth. Quarterly data will be released on February 9. Against this backdrop, we are now tracking FY15E GDP growth at 6.6% (earlier 5.5%). This supports our India bottoming out view. At the same time, we will firm up our growth forecasts after release of quarterly data on February 9. Second, stronger-than-expected GDP data supports our expectation of a relatively shallow RBI rate cut cycle of 100bp by April 2016. As data are not available before FY12, it is not possible to calculate potential growth based on the new GDP series. As of now, we go along with our view that potential growth is around 7.5%. Finally, nominal GDP in the new series is actually marginally lower than that of the old series. At the same time, we still expect India to cross Brazil and Russia in GDP this year to emerge as the second largest BRIC after China (Chart 1). Do read our India 2015 report here


Why? GDP revised to meet international standards

The Central Statistical Organisation periodically revises the GDP series to upgrade to the latest methodology and capture a greater part of the economy. It has upgraded the GDP series to the 2011-12 base year from 2004-05 guided by the recommendations of the international guidelines on the 2008 System of National Accounts on Friday. Major changes include:


Corporate sector coverage: Extended by incorporation of annual accounts of companies as filed with the Ministry of Corporate Affairs (MCA) under their egovernance initiative, MCA21. Partnership firms covered under Limited Liability Partnership Act have also been covered. For the "manufacturing‟ enterprises, MCA21 database has been used to supplement the information available in the Annual Survey of Industries.


Local government: Improved coverage of activities of local bodies – both rural and urban – and autonomous institutions, resulting in better coverage of government activities.


Informal sector: Incorporation of the results of the recent NSS Surveys, viz., Unincorporated Enterprise Survey (2010-11) and Employment-Unemployment Survey (2011-12), along with the adoption of an “Effective Labour Input Method” for unincorporated manufacturing and services enterprises, giving due weights to different categories of workers, i.e., owners, hired workers and helpers, for compiling the estimates of these enterprises.


What? Manufacturing share rises to 15.8%

The new GDP series has captured the changing structure of the Indian economy (Table 1 gives weights relative to GDP at market prices, Exhibit 1 shows weights relative to GVA at basic prices). The share of manufacturing has increased to 15.8% from 11.9% in the 2004-05 series. At the same time, share of trade services is down to 10.9% from 15.2% in the 2004-05 series. Except real estate and construction, the share of all other services has also fallen in the new series. The share of agriculture has increased marginally in the new series to 17.2% from 16.8%.


There is no significant change in the structure of GDP on the demand side (Exhibits 2 and 3). Savings and investment has slowed across the old and new series (Exhibits 4-5).


Why? Structural change driven by methodological advance

FY14 growth has accelerated to 6.9% in the 2010-11 series from 4.7% in the 2004- 05 series (Exhibit 6). This growth has been driven by higher growth in manufacturing, mining and non-financial services relative to 2004-05 base year series. Main reasons behind this upward revision:


  • The adoption of MCA21 database has led to a higher share of mining and manufacturing in GDP and consequently higher growth rate relative to the 2004-05 base year series. It is important to note that the share and growth rate of both these sectors have been declining since FY12 as per the new series confirming the slowdown in these sectors in recent years.


  • ‘Enterprise Approach’ is adopted in the new revision in place of establishment approach for mining and manufacturing. As a result, certain companies that were earlier being covered under the trade category are now correctly being reported under the mining and manufacturing category. This has resulted in a falling share of trade services.


  • Growth rate of non-financial services has increased due to the use of sales/service tax as an indicator for nominal growth.



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