Thursday, July 5, 2012

Capital Economics’ India Report : Another example of poor research

There is a research report from a macroeconomics consultancy firm called Capital Economics, which seems to be getting some degree of visibility in Indian media. As per news reports, the firm attributes the recent slowdown in India to governance issues, estimates sub 5% GDP growth for Q1 and believes no reforms would happen till the 2014 general elections.

Based on all my analyses of the past one year, I believe that Capital Economics might have got some of its economics wrong. I don’t mean to pick on Capital Economics in particular, but this is another example of shallow analysis by a set of experienced folks.

Growth slowdown caused by governance issues?

Lets take a look at its first point about attributing the recent slowdown to governance issues. That seems a little far fetched, when seen in the context of strong growth that has happened during the past five to six years, a period marked by an acute lack of governance. The slowdown of past few quarters is purely short term business cycles playing out, driven primarily by a slowdown across the globe.

Take a look at India’s GDP chart below, which shows the absolute value of GDP at fixed prices over the past seven years. I guess the chart very clearly shows that the long term trend has been pretty much intact, though interspersed with short term cyclical slowdowns. Key point to note is that YoY growth rate charts are not always the right way to interpret these numbers.


Sub 5% GDP growth in Q1 2012-13?

As for sub 5% GDP growth in Q1, I really don’t have a call on such a short term and error prone number. But even if the YoY growth was less than 5% GDP and in say 4.5% range, the long term trend would still remain intact. All that it would mean is that there was a short term cyclical slowdown.

No reforms till 2014?

Regarding Capital Economics’ third point about reform process remaining stalled till the 2014 elections, they might have got this one horribly wrong. In one of my previous analysis I had argued how, with Mamata sidelined, Mulayam in its fold and Pranab as President, Congress has not had it so good in many years. Mulayam provides the numbers in parliament to pass through some of reform measures and Pranab was seen as somewhat as an anti reformist. My sense is that the reforms process will pick up steam as the elections come closer, in order for the government to showcase its developmental story.

Capital Economics past record

Lets now take a look at Capital Economics past forecasts. Copying below an excerpt from a Bloomberg story dated Dec 7, 2008

"Capital Economics` Khan expects India`s $1.2 trillion economy to grow 5 percent in 2009, less than the 6.3 percent forecast by the International Monetary Fund”

In 2008-09, Actual GDP growth was 6.8% and the forecast was being made when half the year was already over and they still got it horribly wrong !

Low quality research from top ranking firms

In my previous analyses, I have been very critical of the quality of research at some of the top firms including Goldman Sachs, Morgan Stanley, Fitch and S&P`s of the world. I guess Capital Economics falls in the same category, though it is in no way considered a ‘top’ research firm, so to say.

But good research also exits

Amongst the top research firms, I have found JP Morgan India (Kalpana Morparia?), to have a very good sense of India’s long term growth story. They had the courage to publicly talk about their confidence in India long term growth trend right during Oct 2008 also, at the time Nifty was around 2500 levels. They continue to stick to their stand on the long term growth trend for India.

There is a nice analysis in NY Times from Vivek Dehejia. He is amongst a handful of economists who has been able to differentiate between long term trend and short term business cycles.

All my detailed analyses of past nine months have continued to suggest that he India long term growth story has been very well intact for the past decade.

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