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Business News/ Market / Mark-to-market/  GDP numbers: treat with care, don’t take recovery for granted
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GDP numbers: treat with care, don’t take recovery for granted

The expenditure side numbers of GDP remain dodgy as ever, the macro numbers don't seem to match up with numbers at the micro level at all levels

With the Supreme Court coming down heavily on coal mine allocations, there is a chance that the mining and quarrying segment will see a slowdown in growth in the coming quarters. Photo: BloombergPremium
With the Supreme Court coming down heavily on coal mine allocations, there is a chance that the mining and quarrying segment will see a slowdown in growth in the coming quarters. Photo: Bloomberg

The 5.7% growth in economic output in the June quarter is something to cheer about, but it doesn’t mean that the recovery is strong. Given the shortcomings in data collection by official government agencies—the index of industrial production’s wild fluctuations being a case in point—the current estimates of gross domestic product (GDP) growth should be treated with some caution.

The expenditure side numbers of GDP remain dodgy as ever. The macro numbers don’t seem to match up with numbers at the micro level at all levels. Take, for instance, the gross fixed capital formation (GFCF) figures. In June, GFCF grew 11.2% at current prices, well over the 2.9% growth seen in the year-ago quarter. However, the revenues of 166 listed capital goods firms didn’t show such a dramatic increase. Their combined topline grew 3.38% in the June quarter compared to 1.24% a year ago.

Given that listed firms are typically the biggest and the best, shouldn’t their growth be better than GDP growth? Secondly, a lot of analysts also pointed to export orders boosting earnings of companies in the capital goods sector. Therefore, if one considers only their domestic revenues, then their topline growth should be even lower than the reported numbers. So what is driving GFCF growth?

Note also that domestic order inflows haven’t shown any great pickup in the June quarter. For the top listed firms, domestic orders have actually shown a decline from the year ago period. This means that future GFCF growth will also be affected.

In any case, some of the growth in economic output could also be a result of increased spending owing to the elections, which were held across April and May. That is a one-off factor. The spending push and related multiplier effects aren’t going to be visible in the months ahead. Secondly, with the Supreme Court coming down heavily on coal mine allocations, there is a chance that the mining and quarrying segment will see a slowdown in growth in the coming quarters. Moreover, the electricity sector might find it difficult to replicate the high growth seen in the June quarter—the thermal sector might find it difficult to source coal while the lack of rains will impact hydro power plants. These difficulties come on the top of a high base of September 2013 quarter.

This is not even considering the impact of poor rain on the agriculture sector. Thus, only the September quarter numbers will tell us whether the latest GDP numbers represent a dead cat bounce or something more sustainable.

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Published: 31 Aug 2014, 11:37 PM IST
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