Beating analysts’ forecasts by a wide margin, India’s real GDP grew to a six-quarter high of 8.4 per cent in Q3 (October-December) FY24.
As a result, the National Statistical Office (NSO) has upwardly revised the growth estimates for the full fiscal year from 7.3 per cent (per first advance estimates released in January) to 7.6 per cent in the second advance estimates.
The headline GDP print, at first glance, signifies India’s impressive rebound from the pandemic-induced slowdown in FY22 and FY23. It signals resilience within critical sectors like manufacturing, electricity, and construction, despite facing a challenging external environment.
Notably, amid geopolitical crises and impending deflationary risks worldwide, India’s quarterly and yearly growth figures position it as the world’s fastest-growing economy today.
However, a closer examination of the third-quarter macroeconomic data reveals surprises that necessitate a more nuanced interpretation.
First, the NSO figures not only surpass the estimates of various analysts, research and rating agencies, but also diverge considerably from RBI’s projection of 6.5 per cent Q3 growth.
Even in terms of growth rate for the full fiscal year (FY24), the NSO estimate is 0.6 percentage points higher than the RBI estimate.
Data reliability
These raises questions about the reliability of official macroeconomic data.
Second, the NSO data clearly shows a wedge between two crucial measures – the GDP (a demand-side indicator) and the Gross Value Added (GVA) at basic prices (a supply-side indicator).
From no difference between the GDP and GVA growth numbers in Q1FY24, the gap has significantly widened to 190 basis points in Q3, touching a 10-year high.
Notably, the gap averaged 20 bps in the last eight quarters. A significant gap between GDP and GVA estimates could complicate policy formulation.
For example, while quarterly GDP growth rates exhibit an uptick from 8.2 per cent in Q1FY24 to 8.4 per cent in Q3 FY24, the GVA growth rates show deceleration from 8.2 per cent to 6.5 per cent in the same period.
A declining GVA growth suggests a slowdown in productive economic activity, which could affect long-term sustainability and potential job creation. The wedge between GDP and GVA growth rates gives conflicting signals about the actual state of the economy, making it difficult for the government and the central bank to gauge the impact of its policy interventions or to set fresh directions.
Third, as defined, the divergence between GDP and GVA numbers by about 2 percentage points should be accounted for by higher net indirect tax collections in Q3FY24.
Higher taxes and lower subsidies have subdued private consumption growth (3.5 per cent) and agriculture growth (-0.8 per cent), which are not encouraging signs for the economy. Thus, there is little to cheer about the high real GDP print as it masks the growing weaknesses on both the demand and supply sides.
Fourth, closer scrutiny suggests that optimism over economic prospects must be tempered with caution. For example, the Q3FY24 growth rates have been buoyed by an 11.6 per cent y-o-y growth in the manufacturing sector. However, the growth rate is on the base of a negative 4.8 per cent growth in Q3FY23.
IIP, PMI divergence
Again, if we look at NSO’s Quick Estimates of the Index of Industrial Production (IIP) between October and December 2023 released earlier, the Index grew by 5.9% on average, while manufacturing output (that accounts for almost four-fifths of total industrial production) grew at just 5.1%.
One may recall that the headline Manufacturing Purchasing Managers’ Index (PMI) had fallen to an 18-month low of 54.9 in December 2023. Such significant gaps among different indicators clearly underscore the necessity of scrutinizing multiple metrics to gauge the true economic trajectory, and to temper the dominant narrative with greater nuance and objectivity.
Finally, though GDP growth has served as the primary gauge of a nation’s economic vitality, the incongruities discussed above suggest that this metric may not always present a realistic view of economic performance.
Delving into alternative indicators, such as Gross Value Added (GVA) or other high-frequency indicators, is imperative to unravel the underlying growth dynamics more accurately.
The writer is Assistant Professor of Economics, IIM Ranchi