Delving into the recently released GDP numbers for July-September 2015, we can see several contentious elements in the methodology. The new value-added method of calculation should reflect corporate performances quite closely since it incorporates filings by lakhs of companies. However, while aggregate corporate earnings shows flat growth, the GDP is supposedly up by 7.4 per cent year-on-year.
Another contentious element would be the method of calculating growth in tax collections. According to the method, growth that has occurred due to hikes in tax rates would have to be offset, while growth that has come "organically" due to greater business activity would be taken into account.
A third element is the choice of deflator. Nominal GDP growth is always adjusted by the inflation rate in order to gauge real GDP growth. Indian national income accounting uses the Wholesale Price Index (WPI). The WPI ran negative through the Q2, 2015-16 compared to Q2, 2014-15. So, nominal GDP growth of about six per cent has been adjusted upwards to 7.4 per cent. Meanwhile, the Consumer Price Index (CPI) saw averaged inflation at about five per cent during the same period. If the CPI was used, instead of WPI, the real GDP would have been reckoned to be considerably lower that six per cent.
Arguing about which price index should be used for inflation adjustment is pointless. But, the differential between the inflation rates and the change in sign - positive inflation for the consumer versus negative inflation for corporates - is certainly worth taking into account.
This is a very unusual situation for India, at least. It also might not last very long. It makes trend projection very difficult. It also explains why the common man is unlikely to "feel" GDP has risen by 7.4 per cent because the consumer certainly doesn't think inflation is running negative. If inflation drops for the corporate as WPI implies, and it rises for the consumer, margins should have expanded for the manufacturers and service providers.
The "sign difference" might be eliminated either in this quarter or the next. For example, crude prices hit lows in January 2015 and there could be a base effect that pushes WPI in January 2016. We have also seen signs of rising CPI inflation as food prices, pulses in particular, have gone up in Q3. As and when the WPI goes positive, there could be a sudden drastic drop in GDP growth numbers, unless there is a strong pickup in business activity.
The problem is, those numbers are now very unreliable. Adjusting them to reflect inflation will be tricky.
Yet, they are likely to have some sort of impact on the market and on market sentiment, every time that they are released. There is a knee jerk feel good factor if GDP, inflation, IIP are better than expected and similarly there is a knee-jerk negative effect if those numbers are below par.
The correlation between corporate numbers and GDP has actually become more difficult to assess in the current situation. Corporate numbers are always nominal and unadjusted and the inflation indices have wandered in different directions for a long period. This situation may continue for a while or it may correct at the end of the October-December 2015 quarter.
A return to "normalcy" - positive inflation on both indices and a predictable difference between the two could create another set of surprises. If the market reads those numbers wrong, the smart trader could get an opportunity to trade macroeconomic data in effect.
The author is a technical and equity analyst
