TAG: GS 3: ECONOMY
THE CONTEXT: The recently released data by the National Statistical Office (NSO) on India’s economic performance in the third quarter of 2023-24 has sparked discussions due to a notable divergence between Gross Domestic Product (GDP) and Gross Value Added (GVA) growth rates.
EXPLANATION:
- This divergence, reaching a 10-year high, has raised questions and concerns among economists and policymakers.
Background of the Divergence
- The 190 Basis Points Gap:
- In Q3, the gap between GDP and GVA growth rates widened to 190 basis points, the highest in a decade.
- This divergence is primarily attributed to a significant increase in net taxes and a simultaneous decrease in subsidies.
Surprising GDP Growth in Q3
- GDP Exceeds Expectations:
- India’s GDP growth in Q3 reached a six-quarter high of 8.4%, surpassing estimates by the Reserve Bank of India (RBI) and economists.
- The unexpected surge in GDP influenced the upward revision of the full-year GDP estimate to 7.6%.
- Sectoral Growth Highlights:
- Several sectors, including manufacturing, mining, construction, trade, hotels, transport, and communication, witnessed robust growth.
- Agriculture, however, experienced a contraction in Q3.
Reasons Behind the Divergence
- GVA Growth Lags Behind GDP:
- GVA growth in Q3 was 190 basis points lower than GDP growth, raising suspicions of potential overestimation of GDP.
- GVA measures national income from the output side, excluding taxes and subsidies, while GDP adds these components.
- Impact of Lower GDP Deflator:
- A lower-than-usual annual GDP deflator (1.4% in FY24) has contributed to potentially overstating real growth.
- The deflator, based on the wholesale price index (WPI), influences the comparison of real economic activity across years.
Factors Contributing to Q3 GDP Surge
- Sectoral Contributions:
- Except for agriculture, all major sectors showed substantial growth in Q3, contributing to the overall GDP surge.
- Manufacturing, mining, and construction witnessed notable expansions.
- Expenditure Side Support:
- Investments, particularly in real estate, played a crucial role in supporting GDP growth during Q3.
- Gross fixed capital formation, indicating investment levels, recorded a growth of 10.6%.
Revisions and Historical Context
- Revised Growth Rates:
- Previous financial years’ growth rates underwent revisions, benefiting from a favorable base effect.
- GDP growth estimates for the current fiscal year were revised upwards, showcasing improved economic performance.
- Historical Divergence:
- The divergence between GVA and GDP growth rates is not only limited to Q3 but extends to the full financial year.
- GVA is expected to grow at sub-7%, while GDP is projected at 7.6% in FY24.
Expectations and Concerns Going Forward
- Focus on Consumption and Investments:
- Analysts emphasize the need for a broad-based improvement in consumption growth and private investments.
- GDP growth, primarily supported by investments, faces challenges with subdued private consumption growth.
- GDP Deflator Impact on FY25:
- The GDP deflator’s anticipated growth in FY25 may influence real GDP growth, potentially slowing down economic expansion.
- Profit growth, input cost dynamics, and government capital expenditure are critical factors to monitor in the coming quarters.
GDP:
- The GDP measures the monetary measure of all “final” goods and services— those that are bought by the final user— produced in a country in a given period.
- GDP = private consumption + gross investment + government investment + government spending + (exports-imports)
GVA:
- The GVA calculates the same national income from the supply side.
- It does so by adding up all the value added across different sectors.
- According to the RBI, the GVA of a sector is defined as the value of output minus the value of its intermediary inputs. This “value added” is shared among the primary factors of production, labour and capital.
- GDP = (GVA) + (Taxes earned by the government) — (Subsidies provided by the government)