To gain clarity about growth, economists advocate gross value added versus GDP

Bengaluru: The official data may have overstated India's economic growth in the October-December quarter (Q3FY24).

On Thursday, the National Bureau of Statistics said India's GDP grew 8.4 percent in the third quarter, beating estimates. However, there is consensus among economists that this is primarily due to strong net tax revenues and the government's control of subsidy spending, which could evaporate in the coming quarters.

Gross value added (GVA), which grew 6.5 percent in the quarter, is believed to be a much better indicator of actual economic growth.

“The better-than-expected GDP growth was mainly driven by strong growth in net taxes and gross fixed capital formation. “High government capital spending in the first few quarters is likely to push private investments,” Rumki Majumdar, economist at Deloitte India, told DH.

“At the same time, the divergence between GDP and GVA reflects that the expenditure side of the economy (GDP) is likely to grow faster than the production side (GVA). This divergence could indicate a mismatch between demand and supply and could impact how inflation could evolve in the coming quarters,” Majumdar said.

For Neelkanth Mishra, chief economist at Axis Bank, this is the biggest divergence between GDP and GVA in a decade.

“This wide gap (between GDP and GVA) followed a rise in net indirect tax growth to a six-quarter high of 32%, which is unlikely to be sustainable. In our view, it may be more appropriate to look at the trend of GVA growth to understand the underlying dynamics of economic activity,” said Aditi Nayar, chief economist at ICRA Ltd.

GDP consists of demand-side components such as private consumption expenditure (proxy for household consumption), government consumption expenditure, gross fixed capital formation (proxy for infrastructure creation), imports, exports, etc. GVA consists of supply-side sectoral economic activities such as agriculture, mining, Manufacturing, construction, finance, real estate and professional services, and other such activities.

According to data released on Thursday, both private consumption and government spending weakened compared to the October-December quarter of fiscal 2023. Therefore, the main driver was the creation of infrastructure.

Rajani SInha, chief economist at CareEdge, said the GVA breakdown was largely in line with expectations and agriculture growth fell only marginally given the weak monsoon.

“Consumption growth has remained weak. The most important aspect to watch out for going forward will be a broad-based improvement in consumption growth. The other crucial aspect would be a significant improvement in private investment. Overall robust GDP growth will be sustainable only if there is a significant improvement in consumption and private investment,” Sinha said.

(Published March 1, 2024, 11:35 p.m IS)