India is in a cloud of economic optimism but its industrial data are in a permanent fog

August 15, 2013

Optimism the Indian economy will soon recover, despite no sign that it is anywhere near doing so, has increasingly led forecasters to overestimate industrial production growth.

Incessant official revisions to the data, after initial forecasts are proved wrong, also mean investors and companies don’t have a clear and timely view.

This too could be another thing holding back Asia’s third largest economy.

The latest industrial data came as a shock this week.

Factory output contracted by 2.2 percent in June from a year earlier, nearly twice as bad as the 1.2 percent fall predicted in the Reuters poll.

That was the eleventh month since January 2012, and the third in a row, in which economists have overestimated it.

In May, they were caught completely off guard, predicting an expansion in output when it fell. This has occurred six times during the past 18 months.

Daniel Martin, economist at Capital Economics in Singapore, who predicted 0.5 percent growth says:

Generally, economists have been expecting India to recover and it just hasn’t materialised. There was a lot of optimism last year when the government announced all those reforms causing many to expect India to revert to the 8 percent growth rate. Forecasters will now start bringing down those expectations.

Month to month movements can be quite tricky to handle and we hope to do a lot better in annual growth rates and where the economy is generally trending.


India announced a host of reforms to attract foreign capital, ranging from increased investment caps in various sectors apart from allowing companies from abroad to set up shop in the country. Those measures haven’t done much good yet.

Cue Prime Minister Manmohan Singh, who declared on Thursday that the positive impact of steps taken to attract foreign direct investment would be felt within months and that the economic slowdown was not expected to last long.

But the Prime Minister’s views are likely based on optimism instead of economic data.

Although the Indian factory production data is published with a 45 day lag, other indicators like infrastructure output data and HSBC/Markit’s manufacturing PMI tend to fill the gap.

Both of these measures suggested factory output came to halt in June, showing at least two weeks ahead what to expect from official figures.

The PMI also pointed to shrinking output, a component that has a high degree of co-relation with the government data.

And frequent and big revisions to official data don’t make things any clearer.

The country’s statistics agency usually revises previous numbers, which is a common practise worldwide — except that sometimes these changes in India are usually quite large.

Apart from completely altering perceptions among financial and business professionals, these changes require large adjustments to forecasts.

In June, the government released the April factory output data only to revise it twice the following day, citing corrections to the power index.

While Martin says investors probably aren’t perturbed by data revisions, “there’s no doubt that it does make it more difficult for businesses to understand what’s going on in the economy.”

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