Saturday, February 8, 2014

Making sense of data...

A lot of times, we see that market participants display complete disregard to facts and data. We do it all the time when we look at information that has bearing on the economy and the stock markets. The latest one to come up is the CSO estimate on 2013-14 GDP growth for India. For the first three quarters, we have seen sub-5% growth. The Finance Minister still maintains that 5% growth is possible and CSO estimates 4.9%.

The tricky bit to remember is that these are either advance estimates or early estimates. Actual data takes some time to collect and is subject to revision. For instance, the last year GDP growth estimate got revised down to 4.5%.

It is not that the CSO would be releasing high estimates as a matter of habit and later revising it downwards as actual data flows in (though some would be cynical enough to say that). What really matters is the way data is collected and processed. Since a lot of estimates are just extrapolation, the quick estimates will overestimate information in a downcycle (as data points are trending down on a progressive basis, the extrapolation will overestimate compared to actuals) and underestimate information in an upcycle. Hence, estimates tend to get revised downwards in a downcycle and upwards in an upcycle as actual data flows in.

I am not arguing again on the data validity. Instead, my point is that the downward revision for the last year GDP means that we were in the middle of a downcycle as we entered this financial year. It also implies that the 1st and 2nd quarter GDP is likely to have been overestimated. Combined with the IMF estimate of 3.8% growth for calendar 2013, it means that 4.9% is very unlikely to be reported for the current year; not even in the quick estimates and certainly not in the revised estimates.

That and information from other indicators (IIP, etc.) and the information collected anecdotally indicates that we need to prepare for a much worse number to be printed than 4.9% or 5%. Those who insist that the Indian economy has turned the corner are in for a rude shock. For one, the local and global cycles are aligning again. While Europe is staring at deflation (and will pump in more money to revive the economy, we will know in June whether ECB will do QE), both the housing markets and the equity markets are overly exuberant. It is not only the Indian market that is running ahead of itself, it is now a global phenomenon.

On the whole, it is not a good combination. As we head into perhaps the most crucial elections in last 17 years, fissures are appearing elsewhere too (the frequency of hiccups from China is also growing). This may be the set up for a major correction and further downtrend on the GDP. India has never bottomed out at 5% GDP growth in a downturn. And this time, it looks even more unlikely.

1 comment:

  1. I certainly agree to some points that you have discussed on this post. I appreciate that you have shared some reliable tips on this review.

    ReplyDelete

 
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