The GDP growth figure stands as one of the most crucial indicators of economic performance, despite the inherent limitations of the concept. This is primarily because it offers an objective measure of an economy's progress, facilitating comparisons with other nations and providing insight into its overall performance. The National Statistical Office (NSO) recently announced in its second advance estimate that GDP growth for FY24 would reach 7.6%, surpassing the previously forecasted 7.3%announced last month. This revised figure is likely to remain stable even in the May release after the fiscal year's conclusion and can be regarded as the final assessment. How should we interpret this growth rate?
There are two perspectives to consider regarding GDP growth as presented by the NSO: the output and expenditure approaches. Each offers a different narrative.
The Output Approach
Let's first examine the output approach, which encompasses the performance of eight broad sectors. GDP is defined as value added plus net taxes (indirect taxes minus subsidies). Value added represents the output within each sector after deducting intermediate costs, which grew by 6.9%.
Six of the eight sectors recorded growth rates exceeding 6.9%, with exceptions seen in agriculture and trade, transport, and communications. In agriculture, the subpar performance can be attributed to below-normal kharif crops, and expectations of a shortfall in pulses, particularly chana, during rabi season, resulting in a modest growth of 0.7% for the year. The trade, transport, etc., segment expanded by 6.5%, which, though lower than the previous year's growth of 12%, is still commendable, reflecting a distinct surge in services driven by pent-up demand, as evidenced by the financial results of companies and buoyant PMIs for services consistently exceeding 60.
Manufacturing, Construction Stood Out
The standout performers in terms of output growth were the manufacturing and construction sectors. Manufacturing recorded a growth rate of 8.5%, compared to a negative growth of 2.2% the previous year, largely due to the base effect.
However, construction's impressive growth of 10.7% can be attributed to the housing boom and government initiatives in infrastructure development, particularly roads. This growth in construction also has positive implications for manufacturing, as industries such as steel, cement, and metal benefit from increased demand.
The Expenditure Perspective, Where Consumption Gives A Mixed Picture
Another perspective on GDP growth lies on the expenditure side, where consumption and investment are the dominant components. Consumption, which accounts for approximately 60% of GDP, presents a mixed picture. While nominal consumption growth stood at 8%, down from 14.2% in FY23, real growth was a mere 3%. This discrepancy indicates that real consumption was impacted by high inflation, which hovered around 5-6% for much of the year, particularly affecting rural demand due to weaker agricultural performance. However, with inflation expected to ease in FY25, a rebound in consumption growth is anticipated.
Investment emerges as a bright spot on the expenditure side, with nominal growth reaching 11.1% and real growth at 11.9%. Moreover, the gross fixed capital formation rate climbed to 31.3% in FY24, a significant achievement given the prolonged period during which the investment ratio remained below 30%. The momentum is expected to continue well into FY25, potentially driving sustained growth in the coming years.
Indirect Tax, Low Subsidy Outflows May Have Led To GDP-GVA Gap
A pertinent question arises as to why none of the polls predicted a growth rate of 7.6% for the year or 8.4% for Q3. This discrepancy can be attributed to the tax component of GDP. For Q3, while GVA (Gross Value Added) growth was 6.5%, GDP growth stood at 8.4%, a deviation larger than the usual margin of 0.2-0.3% seen in recent quarters.
This significant jump can be attributed to robust collections of indirect taxes, particularly GST (Goods and Services Tax), and possibly lower subsidy outflows, the details of which will be confirmed at the year-end. However, data up to January indicate a substantial gap in subsidy disbursements, both in food and fertilisers.
The Reserve Bank of India (RBI) has projected a growth rate of 7% for FY25, based on the assumption of 7.3% growth in FY24. With the revised FY24 growth now at 7.6%, there may be pressure on the FY25 forecast due to the base effect. Nevertheless, as elaborated above, the anticipated uptick in consumption and investment should support slightly higher growth, potentially exceeding 7.5%, provided the external environment, including stable monsoons, prevails.
(The author is Chief Economist, Bank of Baroda and author of 'Corporate Quirks: The Darker Side of the Sun')
Disclaimer: These are the personal views of the author.