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Capital Economics' India Report: Another Example Of Poor Research

A research report from a macroeconomics consultancy firm called Capital Economics seems to be getting some degree of visibility in India's 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 will happen till the 2014 general elections.

Based on all my analyses of the past one year, I believe 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?

Let's take a look at its first point attributing the recent slowdown to governance issues. That seems a little farfetched, when seen in the context of the strong growth that has happened in the past five or six years, a period marked by an acute lack of governance. The slowdown of the 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. The chart clearly shows that the long-term trend has been pretty much intact, though interspersed with short-term cyclical slowdowns. The key point to note is that year-over-year 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 year-over-year GDP growth was less than 5% and in, say, the 4.5% range, the long-term trend would 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 the reform process remaining stalled till the 2014 elections, they might have got this one horribly wrong. In a 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 some reform measures and Pranab was seen as somewhat of 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

Let's now take a look at Capital Economics' past forecasts. Here is an excerpt from a Bloomberg story dated Dec. 7, 2008:

"Capital Economics' Khan expects India's $1.2 trillion economy to grow 5 per cent in 2009, less than the 6.3 per cent forecast by the International Monetary Fund."

In 2008-09, actual GDP growth was 6.8% and the forecast was 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. I guess Capital Economics falls in the same category, though it is in no way considered a "top" research firm.

But good research also exits

Among 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's long-term growth trend during October 2008, at the time Nifty was at around the 2,500 level. They continue to stick to their stand on the long-term growth trend for India.

There is a nice analysis in the New York Times from Vivek Dehejia. He is among a handful of economists who have been able to differentiate between long-term trends and short-term business cycles.

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

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.