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Keqiang Index shows FY16 growth slowed: Ambit economist

India’s gross domestic product (GDP) growth, in no way, accelerated in FY16 as compared to FY15, as indicated by official data, says Ritika Mankar Mukherjee, India Economist at domestic brokerage firm Ambit Capital.


This conclusion has been drawn on basis of the Regional Keqiang Index (named after a similar China-based index) launched by Ambit, which has been conducting extensive research on ground-level economic indicators across the country, Mankar told CNBC-TV18 in an interview.


In an interview with CNBC-TV18, she talked about why there was a need to draw up a parallel economic activity index, what region-wise trends it throws up, her takeaways from yesterday’s IIP and CPI numbers and whether another RBI rate cut is in the offing.

Below is the verbatim transcript of Ritika Mankar Mukherjee’s interview with Anuj Singhal and Latha Venkatesh on CNBC-TV18.

Latha: Can you take us through regional Keqiang index (RKI)? Why is it different from the other prevailing indices like the purchasing managers’ index (PMI)? Index of industrial production (IIP) is definitely outdated and is in for a refurbishing, but why is it better than PMI?

A: The inspiration or the reason why we put this index together, we just thought that whatever you were hearing from the formal CSO numbers was not doing a good job in terms of picking up the actual reality of the economic momentum on the ground.

The core point that got us working on an alternative, quantitative indicator was that we just felt that gross domestic product (GDP) growth in no way had accelerated in FY16 as compared to FY15. We can travel a lot into the interiors of this country, we also track a host of high frequency indicators, 16 to be precise and everything was telling us that FY16 saw a clear and marked slowdown in economic momentum versus FY15 as opposed to what the CSO wanted us to believe which was that economic momentum picked up from 7.2 percent in FY15 to 7.6 percent in FY16.

With that agenda in mind, we have started looking basically for high frequency indicators that were able to actively pick up the ground level signals in terms of economic activity and what we did was basically put together what we call the Keqiang index, learning mainly from China where you had Li Keqiang put together a similar index because he thought that the Chinese GDP data was dodgy.

So four key indicators owning to this regional component — firstly, rural wages, secondly power demand, thirdly banks credit and fourthly cellular subscriber data. So it is a weighted average index comprising of these four indicators.

Latha: What is it telling you?

A: I guess two key takeaways from this herculean task of basically pulling together indicators at the state level on each of these fronts and on a quarterly basis. Takeaway number one is most importantly, it is confirming the point we have been making to most of our investors that there is no doubt about the fact that economic activity levels were lower in FY16 as compared to FY15.

To be very precise what this indicator tells you is that economic activity peaked in mid-FY15 and from thereon till date, broadly speaking, the trend has been downwards.

The other interesting takeaway was we tried to look at the data from a regional perspective, so we basically divided India into three key economic zones or regions. One was north India which we basically define all the states between Jammu and Kashmir, Bihar and Rajasthan. We defined the other region as South India, which is the five big southern states and the third region as middle India, which is Gujarat and Maharashtra.

When we ran this regional Keqiang index on each of these regions over a prolonged period of times, it was interesting to note that south India came through as a systematic outperformer as against North India. So Middle India was sometimes better off than South India, sometimes not so better off than South India.

The second big key message that came through was that South India was the big outperformer as compared to North India which was arguably counterintuitive at some level.

Anuj: What about the data that we got overnight? What are your thoughts on both the consumer price index (CPI) and index of industrial production (IIP) data?

A: On the IIP, it makes life fairly difficult in terms of interpreting the data and what we do is a simple exercise, which is track the 12-months moving average to basically take away all the volatility and the seasonality.

If you look at the 12-months moving average as well, what you can see is that this number recorded a sixth consecutive slowdown. So the March number marked sixth consecutive slowdown in the 12-months moving average of the IIP and that obviously tells you about how economic momentum is panning out in the country and this is broadly in line with what we have been telling our clients.

With respect to the CPI as well, in line with expectations to the extent that we were confident that for FY17, even though growth remains weak is not accelerating. Inflation is going to be broadly in the range of 5-5.5 percent simply because on the food front, this government hasn’t done that much to structurally augment supply.

So while you might have pulses going down, some other category will pop up and that is broadly our view with respect to the CPI number in line with expectations likely to be in the range of 5-5.5 percent in the rest of FY17 consequently leaving very little room for further rate cuts.

Our houseview is that you will get just about zero to 25 bps of rate cut for the whole of FY17.

Latha: That 25 doesn’t come on June 7?

A: A big decider will be what happens at the European Central Bank (ECB) meet on June 2. Also let us see how further inflation data comes through. We are not exactly sure at this point in time that 25 basis points (bps) will necessarily come through on June 7.