India's economy outpaced China's in the December quarter following , but analysts warn the new methodology could hinder the central bank's easing cycle, ultimately derailing growth momentum.
"The consequent danger from mysteriously upbeat data is policymakers may mistakenly infer less [economic] slack, and hence less justifiable [policy] easing to the detriment of the nascent recovery," warned Vishnu Varathan, senior economist at Mizuho Bank, in a note on Tuesday.
"The shifted goalposts lack mileage, comparability and policy pertinence as things stand," he continued.
Asia's third-largest economy expanded 7.5 percent on year in the last quarter of calendar 2014, faster than China's 7.3 percent increase. Meanwhile the government's statistics bureau upwardly revised fiscal 2013-2014 growth to 6.9 percent from 4.7 percent to reflect its new methodology. It anticipates 7.4 percent growth this year.
Obstacles
Monetary and fiscal measures aimed at reducing inflation and the budget deficit boosted India's economy in recent months, but subdued domestic demand and consumer spending remain obstacles. These issues prompted a surprise interest rate cut by the Reserve Bank of India (RBI) last month.
Further policy action may be required to support the economy, but Mizuho fears the new GDP methodology lends to better growth numbers that may limit the scope for central bank action.
DBS shares those concerns: "If the new data is considered accurate by the RBI, it does show you that the slack in the economy isn't significant, and domestic demand is more robust than previously thought. This could mean that there's not enough justification to ease rates further," said Radhika Rao, the bank's economist.
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"If 2015 growth has already rebounded to 7 percent, then I don't think Rajan will be in favor of easing further," she said, adding that market rates are already starting to take easing bets off the table.
On the other hand
Others believe the new readings won't impact RBI policy at all.
"The RBI's recent monetary policy decisions have largely been driven by inflation prints, rather than growth. Under the proposed regime of flexible inflation targeting, the RBI has focused more on the path of disinflation, and this focus is unlikely to change significantly in light of the new GDP data," said Barclays economists in a note on Tuesday.
The new GDP data may suggest recovering growth, but there are no signs of demand-driven inflation that could change the central bank's rate-cutting cycle, Barclays added.
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January retail inflation data, due Thursday, is seen at 5.4 percent, according to a Reuters poll, a touch higher than December's 5 percent reading but still well below 2014's average of 7 percent.
"The new data is not expected to change policy stance meaningfully. The RBI's monetary policy stance is based on the economy's performance relative to potential growth. With only a short history of data available in the new GDP series and a dramatically different history, it is difficult to estimate potential GDP growth of the economy," said HSBC in a report.
What everyone agrees about
Experts say the government's new methodology will require a test of time before gaining market confidence and credibility.
"The new GDP data may take some time to assess and the statistics office is expected to issue guidelines on the new series later this month," cautioned HSBC.
"More runway [and tweaks are] required for the new GDP series to make sense, and for the stronger data to converge with [at least relative] reality," Mizuho's Varathan said.