Q1 GDP growth likely to be weaker at 5.5%, says RBI annual report

An internal assessment of the Reserve Bank of India (RBI) presented in its Annual Report broadly indicates that real growth in gross domestic product (GDP) in the first quarter of 2019-20 would be lower than that achieved in the previous quarter (Q4 FY19). The estimate for real GDP growth for Q1 FY20 is near 5.5 per cent, people with direct knowledge of the matter told Business Standard. The National Statistics Office (NSO) will present the government’s official estimate of GDP growth for Q1 FY20 on Friday. 

The RBI, for the first time, presented an index, known as Coincident Economic Indicator for India (CEII) in its annual report for 2018-19 published on Thursday. The report shows that growth in CEII dropped to its lowest in nearly four years in the first quarter of 2019-20. 

This indicates that the economy in Q1 grew slower than the last quarter of 2018-19. The latter had recorded a 20-quarter low economic growth of 5.8 per cent. 

The government, cognizant of the slowdown, has announced a slew of measures for improving the sentiment in financial markets and prepping up domestic demand in the past two weeks. It is highly likely that a few more measures to reverse the downturn would be announced in coming weeks. 
 

In its two sub-models, the CEII tracks those high frequency economic indicators, which are tightly correlated with real growth in the economy. The model-based estimation of GDP growth has also been consistent with professional forecasters’ survey on the economy, the persons quoted above said. The internal estimation is generally presented to the monetary policy committee that meets every two months. 

 

The CEII helps “nowcast” India’s GDP growth well before the National Statistics Office (NSO), which takes seven to eight weeks to estimate. 

However, people in the know clarified that it was a statistical model that tracks the trends in the economy, and not a substitute for national accounts estimated by the national statistics office. “Nowcast” is a term used to describe a prognosis done very close to the time of result/impact of an event. 
 

Former chief economic advisor Arvind Subramanian had come up with his own study in June, in which he had asserted that India’s real GDP growth was overestimated in the 2011-2017 period. He had formulated an index using high frequency indicators, which had high correlation with real GDP growth for the period prior to 2011, which weakened later. 

The CEII, on the other hand, correlates well with real GDP growth for the 15-year period preceding 2019. Rather, sources said the correlation had become stronger in recent years, than before. 

One of the two sub-models takes into account six high frequency indicators: production of consumer goods, non-oil non-gold imports, auto sales, rail freight, air cargo, and government receipts. The second sub-model which uses nine indicators also considers core IIP (Index of Industrial Production), exports, and foreign tourist inflows. 

Sources said these indicators broadly track the economic activity in manufacturing and services sector to a reasonably good extent. 

The annual report showed a downturn in various economic indicators in Q1 FY20, and almost all the components of the GDP on the expenditure side — private consumption, government spending and investments — looked bleak in the period, it said.