Methodology change sees Indian economy grow faster than China\\\'s

Taken at face value, India on Monday became the fastest growing major economy in the world after its statisticians changed the way they measure Asia's third-largest economy and showed it clocked faster growth than China in the December quarter.
It marks a dramatic turnaround for an economy that a fortnight ago was assumed to be struggling to gain momentum under Prime Minister Narendra Modi's reform-minded government. Prior to Modi's election last May, the economy had endured its weakest phase of growth since the 1980s.
The statistical recovery is in large measure due to changes both in the way authorities calculate gross domestic product (GDP) and the base year.
Under the new method, the economy expanded 7.5 per cent year-on-year during the last quarter, higher than 7.3 per cent growth recorded by China in the latest quarter.
New Delhi also revised up growth for the first half of the fiscal 2014/15 to 7.4 per cent from the 5.5 per cent reported earlier and forecast the full-year GDP growth to accelerate to 7.4 per cent from a revised 6.9 per cent a year earlier.
The new estimate is sharply higher than the Reserve Bank of India's (RBI) growth projection of around 5.5 per cent for the year under the old method.
The reading has left economists confounded as it is at odds with other indicators such as industrial production, trade and tax collection figures, which suggest the economy is still suffering from slack.
"The government has itself been saying that tax collections are slow due to a slowdown in the economy, but the other wing of the government is saying that GDP growth has been good," said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd.
"That means either one part of the economy is not taxed or there is an issue with the data."
India now measures GDP by market prices instead of factor costs, to take into account gross value addition in goods and services as well as indirect taxes. The base year has been shifted to 2011/12 from 2004/05 earlier.
The government's statistics department says the new method is more in line with global practices and gives a better picture of economic activity.
But the statistical fog makes it harder for policymakers to assess the size of the fiscal and monetary aid required to help spur even faster growth needed to generate jobs for millions of young Indians entering the labour force.
Monday's data is key for Finance Minister Arun Jaitley as he drafts the annual budget.
Presenting the 2015/16 blueprint on Feb. 28, Jaitley is widely expected to boost capital spending and offer tax breaks to an under-performing manufacturing sector.
But with GDP data showing the economy suddenly motoring again, the fiscal stimulus could stoke inflation.
RBI Governor Raghuram Rajan, who switched the monetary policy to a new easing cycle in January with the first interest rate cut in 20 months, faces a similar dilemma; whether to lower interest rates again.
"After this number, the RBI will need to understand the dynamics of the high GDP numbers," said Saugata Bhattacharya, chief economist at Axis Bank.
"This pushes back the timeline for rate cuts. Any hope of an off-cycle rate cut in March, even if the budget is consistent with low inflation-driven fiscal policy, does not exist now."
Despite the statistical adjustments, India's growth outlook has been bolstered by falling oil prices, cooling inflation and Modi's steps to make it easier to do business.
Portfolio investors have pumped more than $7 billion so far this year into the country's financial markets.
The International Monetary Fund (IMF) last month also predicted India would overtake China next year as the fastest growing major economy with 6.5 per cent annual growth compared with 6.3 per cent for China.
However, listless corporate spending and mounting bad loans at Indian banks remain a drag.
While stressed corporate balance sheets are hindering a recovery in private capital spending, rising bad banking assets are making banks wary of lending to companies.
"There is clearly the need to look at the credibility associated with these numbers," said Jyotinder Kaur, principal economist at HDFC Bank. "Nothing on the ground has substantially changed to show that we are out of the trenches."
Another report adds: The Reserve Bank of India (RBI) has ordered banks to tighten monitoring of export finance deals after investigators uncovered an invoicing scam they suspect is part of a multi-billion-dollar scheme to exploit Western financial sanctions against Iran.
Although the RBI's ruling made no mention of the scheme that targeted UCO Bank, an central bank source familiar with the matter said it was related to a probe into the suspected misuse of up to $3.2 billion in export advances paid out by the bank.
"Banks should exercise proper due diligence and ensure compliance with KYC (know your customer) and AML (anti-money laundering) guidelines so that only bonafide export advances flow into India," the RBI said in a circular to banks posted on its website on Monday.
Under a provision in US sanctions law, Iran can accumulate oil export revenues with its Asian buyers and use the funds to buy essential imports.
According to sources familiar with the investigation by the Enforcement Directorate, a group of nine Iranians who entered India on student visas set up shell companies in a provincial city to tap into these funds held at state-owned UCO Bank.
Under Indian rules advances for exports, or for the re-export of goods imported into India, should be covered within 12 months by proof that an actual delivery is made. The shipments, which included purchases of diamonds for re-export to Iran, were never made. "Clearly, the export was not happening," said one source with direct knowledge of the investigation by the Enforcement Directorate, an agency responsible for fighting financial crime.
At this stage, the Enforcement Directorate is examining possible violations of India's foreign exchange law and may widen its probe to include money laundering, the source said.
Investigators have confirmed 9.25 billion rupees ($150 million) in suspect transactions involving eight firms. The real figure could be as high as 200 billion rupees ($3.2 billion), according to the RBI source.
The news comes at a delicate moment for Iran, following the revival of six-power talks on its nuclear programme that seek to bridge a rift with the West dating back to the Islamic revolution of 1979.
US Treasury Secretary Jack Lew, whose department oversees sanctions, is due to visit India on Feb. 11-12 after attending a meeting of finance ministers from the Group of 20 nations in Istanbul. A US Treasury spokeswoman had no immediate comment.
Indian refiners buy about 220,000 barrels of oil a day from Iran and deposit 45 percent of the cost in rupees at UCO Bank on behalf of the National Iranian Oil Company. The rest is sent in dollar tranches to Iran, on the nod of the Western powers.
Iran officially draws on the rupee balances to buy food, machinery, medicines and other goods not covered by sanctions. Purchases from India totalled about $5 billion in the last financial year to March 31, 2014.
After being notified by the Enforcement Directorate of its investigation, UCO Bank sent an email to exporters last month, seen by Reuters, saying that it would not facilitate Iran-related transactions by firms that had foreign nationals as company officers.
UCO Bank has said that it acted promptly on being informed about the investigation. It has denied any wrongdoing or negligence.
"Our role is very limited," UCO Bank Chairman Arun Kaul told reporters last week in Kolkata, adding that the bank was complying with government and RBI guidelines and assisting the Enforcement Directorate investigation.
Stricter compliance by UCO will hit India's trade with Iran, said Ajay Sahai, chief executive of the Federation of Indian Export Organisations, adding that he would take the matter up with the trade ministry.
India had expected exports to Iran to hit $6 billion in the fiscal year ending March but in the first seven months of the year they reached just $2.4 billion.