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This Monday, the Central Statistics Office of India announced that the country’s economy had grown by 7.3% last quarter, making it one of the world’s fastest growing economies. Already the 3rd largest economy in the world, India outpaced China’s growth of 6.8% in the same period, and far surpassed its own growth rate of 6.6% in the same period last year. Although it may seem odd that India’s economy is growing faster than China’s, it has happened before. According to the International Monetary Fund, India’s economy outpaced China’s in 1981, 1989, 1990, and 1999, but 2015 is the first case of this occurring in this millennium. However, as stock prices have recently dipped and a new calculation of GDP has been utilized, economists and analysts are reluctant to believe that India’s GDP is the only piece of the puzzle.
India’s government said growth in the October through December quarter was even a slight decrease from previous quarters, which all had been adjusted higher, but India measures its economy over a fiscal year rather than a calendar year. The Central Statistics Office estimates that the Indian economy will grow at a rate of 7.6% in April 2015 through March 2016 period. There are several factors that make India an attractive emerging market, and could help to explain the supposed growth taking place there, such as India being a net importer of oil and having a young population. Because India is a net oil importer, the decline in global oil prices has helped bring the country's inflation down. In addition, a large percentage of India’s population is under the age of 25, making it the ideal destination for numerous consumer and technology companies. By 2020, India is expected by some economists to become the youngest country in the world, while China is dealing with a rapidly aging population and slowing fertility rate.
Despite the benefits of doing business in India, a multitude of economists believe that the official data overestimates the Indian economy’s pace of expansion. According to Jonah Blank, Senior Political Analyst at the RAND Corp., “some observers feel the figure is inflated, and that sectors like IT are booming while core fundamentals like agriculture and industrial manufacturing aren’t performing well: In other words, India’s economy may look better on paper than it feels to a lot of Indian citizens.” Sales of durable goods are subdued, and credit growth is lackluster according to Capital Economics. How could this figure be inflated? Well almost one year ago, India’s statistics ministry changed the way that it calculates GDP by updating the base year used for price comparisons. This is why previous values in the year were adjusted upward, sometimes by as much as 1%.
Current stock prices are being used as evidence that the GDP measures may be inflated. This year, the Indian stock market is down by 7% and as of Monday, the Sensex traded down by 1.3%. The data on growth was released right after the Indian markets closed. While India has many benefits for doing business, the country is having issues reducing bureaucracy, and some laws that could help alleviate the current issues are stuck in parliament. The recent delay of policy implementation in terms of Prime Minister Narendra Modi’s reforms has been what has weakened investor’s confidence in the stock markets. Investors will reexamine India’s budget towards the end of the month when Finance Minister Arun Jaitley is expected to provide an update on India’s plans for reform, especially in regards to infrastructure. The annual budget address will likely be used as an opportunity to defend the calculation of Indian GDP.
Do you think the measures of Indian growth are accurate? Let us know in the comments below, and if you’d like to learn more about India’s economy, please view our economy pages on globalEDGE!
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