In This Economy: Modi Tours, GDP Soars, Trump’s Scorn

Happy Tuesday! Over the last few days, Prime Minister Narendra Modi's packed international schedule has dominated the news cycle. It started with his visit to Japan, which led to the land of the rising sun announcing Rs 60,000 crore in investments into India. He then landed in China for the Shanghai Cooperation Organisation, which led to relationships between the two economies thawing. Finally, on the sidelines of the SCO meet, the PM also had a bilateral meeting with Russia's Vladimir Putin, causing Donald Trump to put some angry posts on his social media platform. The meetings and photo ops all point to a show of strength to the US, which has targeted India, China and Russia with either tariffs or sanctions, or both.

Trump is set to make a speech from the Oval Office later today, but the agenda remains unknown. What lies in store now for the world's largest democracy and the world's oldest democracy as they engage in trade negotiations? Guess we will find out soon.

On to this week's newsletter!

Last Friday India announced its Q1 real gross domestic product growth rate at 7.8%, a five-quarter high. The immediate reaction was shock and awe. Nobody, including the Reserve Bank of India, thought that the first quarter would be so high. The central bank had estimated a real GDP growth rate of 6.5% for the first quarter, while most economist expectations ranged from 6.3% to 6.7%. 

Chief Economic Adviser V Anantha Nageswaran later said that the government has not changed its growth projections from 6.3-6.8% for the financial year. Almost all experts agreed that a single quarter's outperformance might be too soon to tinker with expectations. 

"Much stronger-than-expected GDP growth does not warrant downward revision amid tariff overcast. We retain the FY25-26 real GDP growth estimate at 6.5%," Barclays said in its note after the growth data was released.

Economists were also quick to point out that there are some inflation deflator concerns which persist. Most important of which is that India uses a single deflation method to calculate its real GDP, as compared with the more accurate double deflation method. Essentially, the double deflation method looks at both input costs and output prices separately to arrive at a growth figure. India uses a single deflator, the output prices, for most sectors, except for things like agriculture, mining and quarrying. A single deflator may be exaggerating the growth figure, economists believe.

"Oil prices have fallen by $15 a barrel, which could lead to a 1.5 percentage point exaggeration in manufacturing growth and a 0.2 percentage point exaggeration in headline GDP growth," HSBC economists said in their note.

Another issue is the choice of the deflator employed. To measure services growth, India uses wholesale price indexed inflation, which is actually heavy on prices of manufactured goods. Economists point to the fact that if the National Statistics Office were to employ a consumer price indexed inflation deflator, the growth rate could be lower.

The government is currently in the midst of formulating a new GDP and inflation series, which takes into account the various criticisms of the quality of measurement and data gaps. The new series is expected to be announced in February.

Problems notwithstanding, the growth has still outpaced what economists had originally pencilled in. For example, HSBC economists had estimated a 6.5% real GDP growth rate in the first quarter. Even after adjusting for the data noise, the actual data shows a growth rate of 6.5-7% in the April-June period.

So the underlying growth story is intact, even if the headline number might be under debate. This is also good news for India, which has been targeted by Trump as being a "dead economy".

• SEBI is starting work on a platform for pre-listing trade of shares, Charu Singh reports.

• Zomato is in discussions with restaurant owners to reduce its commissions, as competition from Rapido's Ownly rises, Agnidev Bhattacharya reports. 

• Following the crackdown on real money gaming platforms, the government and banks are working on an exit window for these companies, Rishabh Bhatnagar reports.

• As a counter to the US tariff threat, the government's export promotion scheme is taking shape and will likely receive cabinet approval soon, sources tell Rishabh 

• Deutsche Bank is in talks with potential buyers for its India retail banking business, joining the list of foreign banks pruning their India retail presence. 

I was in Western Australia last month, doing a road trip across coastal towns. I noticed that at nearly all cafes and restaurants on the road, the wait staff mostly consisted of people who were not Australians. It was a bit surprising because most towns in Western Australia are small and don't really seem like places which attract immigrant workers. Turns out, this is because of the government's focused push for international workers in mining towns. This story by Bloomberg points out that the Australian government issued more than 1,400 "fly-in-fly-out", or FIFO, visas in 2024, compared with 500 a year ago. Young travellers from other countries can come into Australia's mining towns in Western Australia for a specified timeframe and can work hectic jobs to earn a significantly higher wage than what they would in their own country. Read this fun story here.

Until next week,

This is Vishwanath signing off!