India’s Q4 GDP Came in at a low 6.1% for Q4 2015, as measured by the new method (which states GDP growth as much higher than the old method). Growth in Nominal terms has fallen to 7.74% which is the lowest in a very very long time. (Nominal = whatever is actually there. Real = Nominal minus the impact of inflation. So, selling 100 items at Rs. 50 versus selling 110 items at Rs. 55 next year has 110×55/100*50 = 21% nominal growth. But only 10% real growth in number of items sold if you ignore inflation.)
In fact, the 7.74% nominal growth number is the one to watch: It is much lower than the nominal growth in previous years (measured by the old method, which would been even higher if the new method was used)
The difference: Apparent lack of inflation.
India’s data uses the wholesale price indexes which have shown low to negative inflation. (Consumer price index numbers have been above 4% for the most part). It’s quite likely that real growth is even lower if you used consumer prices to “deflate” the nominal change in GDP.
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The GDP deflator (the factor by which nominal turns to “real” growth) is at a very long term low of 1.5%! (Note: We have fixed the error in the number reported earlier)
What this means:
India’s never really seen a bout of low inflation. This time, it happened because of lower crude prices, but in general prices overall have fallen. What this means to us is:
- Large salary raises are unlikely – much of which, in the past, were due to inflation.
- Tax collections will suffer. If the government expects to collect 10% more tax, with only 7.7% nominal growth, there is going to be a big problem. In fact the increase in service tax and income tax (which have happened in the budget) will reduce consumption and profits even more.
- Adjusting to lower inflation will make us net savers as people tend to buy when rates are likely to increase. Many retail items haven’t yet seen prices fall, though wholesale prices have fallen (eg. Milk, Ice Cream and so on). This is likely to make for interesting packaging and offers (special offer 20% off, etc).
- Low inflation typically takes three to four quarters to set into the economy. Meanwhile, businesses will find it difficult to keep prices up for their sales, while their inputs (due to inventory and past purchases) will stay higher cost. This will reduce corporate margins and eventually, profits.
Overall, low inflation is a good thing, but it will take the economy many more months to adjust. Having a 6% nominal growth at 2% inflation is better than the 13% nominal growth and 10% inflation we have seen recently. That’s because the government will simply understate inflation, as we have experienced in the last five years.
In general, we believe India will have to adjust to a lower growth rate, going forward.
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