8.4% GDP growth: Look under the hood

India’s GDP during the three months ending in December grew at 8.4 per cent. This is the highest among all large economies of the world. It is heartening to have the economy growing at a relatively healthy pace for three years in a row after the pandemic. It brings good cheer, and the stock markets responded resoundingly. The stock market index keeps attaining new peaks, indicating investor optimism. The slew of announcements, such as approval for setting up of $15 billion of investment in semiconductor manufacturing, speaks of the enthusiasm and confidence of a bright outlook for the economy. 

It is important to go “below the hood” to understand the significance of the headline of 8.4 per cent growth for the December quarter. This is particularly so because the news of such high growth beat all expectations by a wide margin. For instance, the Survey of Professional Forecasters on Macroeconomic Indicators, conducted regularly by the Reserve Bank of India, had predicted a GDP growth rate of 6-6.9 per cent for this year ending in March, very recently. The actual number for the December quarter is nearly 2 per cent higher than the annual forecast. Of course, forecasters go wrong quite often, but not by such a big margin. These forecasters are tracking the economy based on high-frequency data all the time. 

The other puzzle is the gap between GDP growth rate and that of Gross Value Added (GVA) for the same quarter. The latter gives a true measure of the real value of goods and services produced and sold. The world over, it is the preferred indicator of economic health. The difference between GDP and GVA is usually minor and reflects the net effect of taxes minus subsidies. Indirect tax collection adds to GDP while subsidy outgo reduces GDP. These two mostly balance each other out. 

The GVA growth for the December quarter is only 6.5 per cent, nearly 2 per cent lower than GDP growth. This gap is the highest reported in the past 10 years. It has been caused by a steep fall (more than 50 per cent) in subsidy outgo, and a big increase in indirect tax collection. We need to probe deeper to understand whether these are one-off spikes (both positive and negative) or whether such volatility will continue. The GVA growth reported for the past three quarters has been sliding down -- from 8.2 per cent to 6.5 per cent now. Since the total growth rate for 2023-24 is around 7.3 per cent or 7.5 per cent, it means that the fourth quarter, ending in April, will likely report a GVA growth rate below 6 per cent. That data is released only by the end of May.

Another puzzle, apart from the GDP and GVA divergence, is the growth rate of consumption expenditure. This constitutes more than 55 per cent of GDP and forms the bulk. It is growing at only 3 per cent and is at a multi-year low. High growth cannot be sustained without a big push from consumer spending. That, in turn, depends on the sentiment of consumers, their current spending and their plan for future spending (like on white goods, furniture, tourism and travel, etc). Consumers feel optimistic about the future when their job prospects are bright. High unemployment rates, especially among the college-educated youth, can discourage consumption spending. 

The recently released factsheet on the household consumption survey gives a granular view of monthly spending on consumption. The survey came after a gap of 11 years, and over this period, the growth, on average, has been 164 per cent in rural areas, and 146 per cent in urban areas. These numbers are in nominal terms, i.e., they do not account for inflation adjustment. Adjusted for inflation, the real growth in consumption as per the survey works out to 40 per cent for rural areas and 34 per cent for urban areas, over a period of 11 years. Thus, the consumption growth based on the National Sample Survey (NSS) is barely 3.5 per cent over a long period. Of course, there has been this well-known discrepancy between consumer spending as revealed by NSS and as revealed by the Central Statistical Organisation (CSO). And this gap is still too wide. But it is important to look at the data from these two lenses and try to get some consistency and remove defects in measurement, if any. The fact is, high GDP growth and low consumption spending growth do not sound consistent.

A third aspect, when we look “under the hood”, is the performance of industry and the agriculture sectors. GDP can be measured from the spending side (i.e., consumption, investment, net exports, and government spending), or it can be measured from the production side (i.e., agriculture, industry, and services). When we look at the latter, agriculture growth has fallen below zero for the December quarter. This negative number is explained as a base effect, since the quarterly numbers are growth over corresponding numbers one year ago. Since that number for the December 2022 quarter was above 5 per cent and was a “high base”, the present number is negative. Be that as it may, the overall contribution of agriculture to GDP growth this year will be below 1 per cent as per the latest estimates. This is worrying for various reasons, most importantly for what it means for the livelihoods and incomes of rural families. Industrial growth at 11%, too, is because of the “base effect” of just 0.6 per cent a year ago.

Finally, one more piece of the puzzle is the difference between nominal and real GDP growth. It is because of inflation, and the correction at the national level is done by the GDP deflator. This number has been reported to be just 1.6 per cent, indicating nearly no inflation at all. But surely, that is a gross underestimate. If GDP growth is 8.4 per cent, then nominal GDP growth is expected to be at least 12-13 per cent. It was only 10 per cent higher in nominal terms during the December quarter, as compared to one year ago. The GDP deflator is too low.

Whether it is the gap between GDP and GVA growth rates, or between GDP and consumption spending, or the relatively low sectoral rates, or the very low deflator, all of these point to the need to triangulate the aggregate GDP data with more granular and high-frequency sectoral data. This calls for a massive overhaul of the machinery that collects data on a real-time basis.

(The writer is a noted Pune-based economist) (Syndicate: The Billion Press)