RBI cut its key rate for the third time this year, less than a week after data showed economic growth rocketing to 7.5%
NEW DELHI—India’s central bank lowered its main policy interest rate for the third time this year on Tuesday—less than a week after the government released data showing economic growth in the last quarter rocketing to 7.5%.
“It is a discrepancy, in the eyes of the world, why we still think the economy needs rate cuts,” said Raghuram Rajan, governor of the Reserve Bank of India, after reducing the overnight-lending rate a quarter-of-a-percentage-point to 7.25%. “Most economies growing at 7%, 7.5%, are just going gangbusters, and the issue really is to restrain growth rather than to accelerate growth.”
The paradox shows that months after India’s government statisticians adjusted their methodology for estimating gross domestic product, policy makers still find themselves looking beyond GDP for a fuller picture of the economy’s health—and concluding that despite the world-beating official growth rate, weakness abounds.
India’s brisk expansion in the first quarter of this year outshone China’s 7%, making Asia’s third-largest economy a global bright spot as activity in developed and emerging economies wobbles.
But India’s GDP data have been throwing off confusing signals since January’s revision. Recent output growth got a big boost—more than two percentage points in some cases—baffling analysts and officials.
Mr. Rajan on Tuesday said investment is torpid and cited feeble corporate revenue growth as evidence of weak demand. One of his deputies, Urjit Patel, said the way firms are pricing their products suggests they’re uncertain about the market’s strength. Year-over-year, wholesale prices fell in April for the sixth consecutive month. Consumer-price inflation has been subdued.
If GDP is expanding at more than 7% today, Mr. Patel said, then the country’s potential growth rate is closer to 8% to 8.5%. “We are under no illusion that the economy, especially investment, is up and running. It is not. And it needs support,” Mr. Rajan said.
Other gauges that RBI officials have previously said appear at odds with the GDP numbers include railway and port traffic, air-passenger traffic, industrial production, motorcycle and tractor sales, and bank credit and deposit growth.
India’s cargo traffic—whether by rail, air or sea—is sluggish. Two-wheeler sales are decelerating. March’s factory-output reading showed the slowest growth in five months, though the seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index indicated a 19th straight month of expansion in May. Exports fell in April for the fifth month in a row.
Few believe the latest GDP readings have been fudged. Even before this year’s revision, India-watchers had plenty of reasons to keep their eyes on a wider range of indicators.
Chetan Ahya, Morgan Stanley’s chief Asia economist, has long constructed his own running estimate of India’s month-by-month growth. He represents each component of GDP with proxies: electricity production, passenger-car and two-wheeler sales, commercial-vehicle sales, machinery and equipment imports, government spending and exports.
Mr. Ahya’s proxy growth computation had already proved useful, he said, on occasions when the government’s previous GDP readings were volatile or otherwise suspect. “It’s come to our rescue even more” since the official revision, he said.
Gaurav Kapur, an economist with Royal Bank of Scotland, looks at monthly industrial production surveys as well as data, collected by the central bank, on the performance of 2,500 companies. For the financial sector, he looks at credit and deposit growth, as well as at companies’ overseas borrowing.
He also watches monthly government spending, as well as power-generation and mining statistics. The latest GDP numbers have “not been in line with the activity level captured by these data,” he said, though he still sees gradual recovery taking hold later this year.
Morgan Stanley’s Mr. Ahya says the broader picture for India is hardly full of gloom and doom. “The rate of growth is the debate more than the direction,” Mr. Ahya said.
With China’s expansion downshifting substantially, India is doing better “no doubt,” he said. In steel, cement and electricity production, for instance, even unspectacular growth figures out of India are enough to put it ahead of its northern neighbor, he said.
For now, though, India’s GDP figures will continue to turn heads, and not necessarily for good reasons. As Dharmakirti Joshi, chief economist at the ratings firm Crisil, puts it: “If it walks like a duck and talks like a duck, then it’s probably a duck and not a peacock.”
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