Deciphering India's GDP Growth: GVA A Better Indicator Of Growth

The release of India's GDP growth rates often throws up as many questions as it answers. The latest one was no different.

While India's GDP during the October-December 2023 period grew significantly, it was partly on account of net indirect taxes. The GDP growth for previous quarters too saw a sharp revision, reaffirming that the Indian economy remains strong, while still leaving economists and policy watchers to reconcile figures with economic activity.

India's GDP grew by 8.4% year-on-year in the October-December quarter, according to the latest estimates released by the government's statistical agency. This was sharply higher than estimates.

A Bloomberg poll of economists pegged GDP to grow 6.6% in the October–December period. GVA was expected to expand 6.4%.

The divergence was on account of net indirect taxes.

GDP and GVA: The Wi...de Divergence 

National accounting basics spell that GDP is GVA plus net indirect taxes or NIT. NIT is indirect taxes minus subsidies, Dhiraj Nim, economist at ANZ, explained. Net Indirect taxes grew by 32% year-on-year, creating the large GDP-GVA growth gap.

GVA growth was largely in line with market expectations.

Fiscal revenue spending slowed sharply in Q3 FY24 (-11% year-on-year), which likely bloated the net indirect tax component, Nim explained in a post on LinkedIn. Banking liquidity deficit that widened unexpectedly reflected this, as did the contraction in public final consumption expenditure.

Revisions To FY25 GDP Growth Forecasts 

"Considering today's print and strong momentum showcased by growth numbers across Q1-Q3 FY24, we raise our FY24 GDP growth forecast to 7.8% from 6.7%, with upside risks given Q1-Q3 FY24 growth is currently averaging 8.2%," stated a research note by Rahul Bajoria, chief economist at Barclays. For FY25, Barclays forecasts GDP growth at 7% from 6.5% previously.

"We expect the steady domestic growth momentum to continue, supported by continued increases in government capex, much anticipated rising private investment and monetary easing," explained Bajoria.

With growth moving faster than expected by the RBI, the central bank will see little urgency to cut rates while the MPC awaits for comfort on headline inflation, he said. Barclays now forecasts a rate cut in the July-September 2024 quarter, instead of in the April-June 2024 quarter.

Private Consumption: Achilles Heel? 

Growth in private consumption expenditure has recovered from the last quarter's growth of 2.4% year-on-year to 3.5% in the October-December quarter. Despite sequential improvement, overall consumption growth continues to remain feeble below the pre-pandemic average of about 7%, said Rajani Sinha, chief economist at CareEdge. A combination of factors, including a deficient monsoon and persistent food inflation, has exerted pressure on rural demand sentiments.

 Looking forward, the outlook for rural demand appears to be mixed, according to Sinha. Uncertainties pertaining to agricultural prospects and elevated prices of essential food items are expected to persist as challenges, she said. However, government initiated relief measures, particularly in the run-up to elections, such as the reduction in LPG prices and the extension of the Prime Minister Garib Kalyan Yojana for an additional five years until 2029, are anticipated to provide a certain degree of relief and support.