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Measuring the world

As India's first Covid GDP is announced, investors need to learn to ignore it for quite some time to come

Measuring the world

Six months ago, let's say you were asked this hypothetical question, "Imagine a situation in which India's quarterly GDP is 23 percent less than that of the corresponding quarter a year before. What would you expect the situation in the stock market to be in such a time?"

My honest answer would be that I would not expect the stock market to be operational in such circumstances. I would have imagined that whatever event pushed GDP down by one-fourth would force the equity markets to go into an infinite loop of downward circuit breakers, day after day, week after week till for all practical purposes there would be no functioning markets. I think most people would have agreed with me.

And yet here we are. GDP is down by a quarter in a quarter and I've sat down with my laptop to try and explain to you why the market is constantly rising. Strange times, indeed. So where's the glitch in the matrix? Why has this disconnection arisen?

To understand what's going on, and what will happen going forward, the most important thing is to appreciate what's real and what's not. Or, to put it more vividly, what is the map and what is the territory. Two weeks ago, I wrote in these pages that GDP metrics are not trustworthy in this situation. That's because GDP itself is not a physical measurement in any meaningful sense. There's no such thing as GDP out there in the real world. The number itself is a result of a model that has a huge number of assumptions, heuristics and thumb rules built into it. Parts of it are indirect derivations and the results of sampling exercises. All these work with the caveat 'all else being equal'. That caveat mostly does not apply in normal times but applies strongly now.

The best you can say about GDP is that if the basis of these assumptions etc do not change, and the same methods of measurements continue to be used, then it's comparable to its own past measurements. As should be obvious, many significant assumptions about economies have been hit for a six over the last few months. Of all the things that you can use to measure the world today, GDP is the least useful. In fact, it's less than that - it's actively harmful to take it seriously and to make it part of your decision-making framework. And as you can see, the world over, India included, equity investors are not taking current GDP measurements seriously. I mean the direction of the changes is obviously correct but the actual measurement is not meaningful.

So what kind of measurements should one trust? Obviously, those that are actual measurements and that too of a complete activity, not just a sample thereof. GST is a great example. GST is real in the sense that GDP is not. In the April-June quarter, GST collection was 41 per cent lower than the corresponding period of last year. In July and August put together, it was 13 percent lower. Don't jump to the conclusion that these numbers are representative of GDP. Please ignore GDP altogether. These are real measurements, based on actual business transactions and they will tell you far more about what is going on. Of course we all know that a large chunk of very small businesses are outside the GST system but as indicators these numbers are far superior to GDP.

As for the equity markets, there are two parts to the story. One is the clear expectation that there will be a sharp recovery and the other is the simple fact that there's money chasing stocks all across the world. Of course there will be no even and smooth recovery and many industries will go into longish, perhaps terminal recessions.

Even so, the path ahead is now becoming clearer and I for one am increasingly convinced that there will be many positive aspects of this shock.