Magicians can pull off roses from an empty flowerpot or they can fill the flowerpot with water without even touching a jar containing water. Most of you would know that magicians are illusionists in reality. Although you know this, you would still enjoy watching magic tricks as they are a great source of entertainment. But when actual numbers create an illusion; it is harmful. These days Central Statistics Office (CSO) is leaving all magicians behind. It is driving the growth engine of Indian economy only with numbers. Don't you trust this? Just have a look at these facts.
 

• As per the latest numbers, Indian economy is the fastest growing economy among large economies of the world
   
• Also, Indian economy has become a 2 trillion USD economy
   

What are the GDP numbers?

Beating all estimates, India's GDP showed a growth at 7.5% in the 3rd quarter of the Financial Year (FY) 2014-15.
  How different segments of the economy have performed?

Industry	Weightage in GDP	Q3 Growth rate
Agriculture	20.8%	-0.4%
Mining	2.8%	2.9%
Manufacturing	16.4%	4.2%
Electricity, water, gas services	2.3%	10.1%
Construction	7.8%	1.7%
Trade, Hotel, Transport, Communication	18.6%	7.2%
Finance, Real Estate, Insurance	18.1%	15.9%
Public Administration, Defence and other services	13.1%	20.0%

Data as on February 09, 2015
(Source CSO, PersonalFN Research)  

Robust performance of financial, real estate and professional services along with strong performance of public administration, defence and other services contributed significantly in the growth of GDP during October-December quarter of the current fiscal. Despite poor performance of agriculture, construction and allied sectors, India's GDP grew at a healthy rate as manufacturing sectors shrugged off gloomy phase. Moreover the performance of electricity, gas, water and other utility services was also impressive. Surprisingly the full year-estimate of GDP growth has been pegged at 7.4% for the current financial year which is higher than the growth of 6.9% forecasted earlier. RBI expects Indian economy to grow at 5.5% in the current fiscal.

Why GDP grew at an unexpectedly high rate?

Recently, CSO changed the methodology for calculating Gross Domestic Product (GDP). Change in methodology is considered as a major factor contributing to the rise of GDP. However, according to CSO, new method is more polished and is in accordance with the globally accepted practices. Earlier, India happened to measure GDP on factor costs method. Under new method, GDP is being measured at market prices adjusted for taxes and subsidies. Also the base year has been changed to 2011-12 from 2004-05 applied earlier. What makes these facts tough to believe is lack of support from other economic indicators. Other economic indicators such as Index of Industrial Production (IIP) data, bank credit data and more importantly Government tax collection do not back such a huge jump in the GDP.

What to expect?

It is expected that, India's economy would grow at a pace of 7.4% in the current fiscal. As per the new method, Indian economy grew by 6.5% in the 1st quarter (April-June), 8.2% in the 2nd quarter (July-September) and by 7.5% in the 3rd quarter (October-December). This means, India's economy has to grow at a pace of 7.4% at least to achieve the estimated average growth of 7.4% in the current financial year. It is also expected that, Private Final Consumption Expenditure (PFCE) as a percentage of GDP may dip marginally this year. Gross Fixed Capital Formation (GFCF) may also slow a bit. However, there could be marginal rise in the Government Spending counted as a percentage of GDP. Imports and export both may come down as compared to those recorded in FY 2013-14 as a percentage of GDP. Having said this, per capita income is likely to rise by 6.1% in the current fiscal.

Agriculture, forestry and fishing sector may record a growth of just 1.1% this fiscal as against the growth of 3.7% recorded in 2013-14. As estimated by the Department of Agriculture and Cooperation (DAC) production of food grains is expected to decline by 2.9% in 2014-15 as against the rise of 3.0% registered in 2013-14. Risk of high inflation may arise again, if the situation of fall in output of food grains is not handled properly. RBI may closely track level of agricultural output.

Would the new method reflect a true picture in future?

It remains to be seen how dependable the GDP estimation would be even in the future. To know the troubles with the new method, you need to first understand how the GDP is calculated. PersonalFN tells you in brief.

Under the new method – Gross Value Added (GVA) (which measures the difference between output of goods and services and intermediate consumption / inputs and raw materials) is calculated at basic prices (base year 2011-12), adding to it the sum of all taxes collected on domestically produced products as well as duties collected on the imported products. The subsidies, if allowed, are deducted towards the end, to arrive at the final GDP number.

This suggests that, tax collection remains the crucial part of GDP. As per the new method; weightage of the agriculture sector appears to be substantially higher. As you must be aware, agricultural activities are not taxed in India. This also suggests that, there is urgency to bring in harmony among all economic indicators to make them credible and for making their effective use for the benefit of the Indian economy.

How markets reacted?

Markets have been under pressure due to a combination of unfavourable global factors as well as domestic factors such as possibility of BJP losing Delhi elections. On the day of poll results actually coming to hand, markets rose, bucking the losing streak of almost a week. It appears that, rather than cheering the unusual rise in GDP, markets rose indicating that, they have already factored in the defeat of BJP. It is also expected that, the budget is unlikely to be populist on the backdrop of outcome of Delhi elections. Now all eyes would be on the Finance Minister and his first full-budget which is scheduled to be announced on February 28, 2015.

What investors should do?

You must be wondering what you should do to your investment portfolio in a drastically changing environment. PersonalFN believes you shouldn't make any shifts to your portfolio based on macro-economic changes. Such approach is speculative and may lead to severe loss to your portfolio if your predictions go wrong. Keeping the steep equity market valuation in mind you can go slow on your equity investment and stagger your investment to benefit from any near term volatility. On the other hand, debt market investors should not speculate on the falling yield, as most of the rally might have already taken place. Your exposure to longer maturity debt instruments should not exceed 20% of your debt portfolio. PersonalFN believes, you should focus on your financial goals and invest as per your personalised asset allocation.

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