Analysis: GDP Second Advance Estimates Encouraging

Analysis: GDP Second Advance Estimates Encouraging

Starting from a point of strength one can see the path for FY25 being fairly clear. In the absence of an adverse monsoon and global commodity prices being stable, growth should be on the upward path.

Madan SabnavisUpdated: Saturday, March 02, 2024, 10:32 AM IST
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The second advance estimates of GDP for the year are extremely encouraging. This buttresses the fact that the economy is doing very well and India will continue to be the fastest growing large economy for another year. In fact, the growth rate for FY24 has been revised upwards to 7.6% from 7.3% which is higher than any other private estimate. How has this come about?

There are two factors which have worked in propping up the economy. The first part is e growth from various sectors which have been commendable. Agriculture is the only outlier with growth of 0.7% for the year. This was one expected lines as kharif output was to be lower than last year and rabi sowing too was scattered. Add to this the fact that allied activates were affected by the erratic monsoon, and this growth rate was bound to be depressed.

The other sectors were on an upward trajectory. Let’s look at how this played out. First manufacturing started from a low base of -2.2% growth which hence had an advantage. Growth topped at 8.5%. One can guess that the infrastructure base industries like cement and steel led the way given that the consumer industries did not perform well going by the corporate commentaries in the first three quarters.

Second, the services sectors did very well. The main factor here was the pent up demand phenomenon seen in the services sector in 2023. Just as it was seen in 2022 when manufacturing witnessed an uptick in demand, the same got replicated for services in greater measure. Hence trade, transport, communications etc. registered growth of 6.5% and financial services and real estate 8.2%. The public administration and other services segment which is representative of government expenditure was also on track with 7.7% growth.

Third, construction as on a roll with growth of 10.7% on top of 9.4%. This is a labour intensive sector of the blue collar variety and hence has had good backward linkages to other segments of the economy. In fact, this fed into demand for all industries dealing with infra products like steel, engineering, cement etc. The push given by the government to roads as well as housing has helped here. FY23 has been a good year for the real estate sector with people booking houses across all price segments. This combined with the highway push has resulted in a good performance.

The second significant factor of this growth has been the tax effect. GDP is defined as the sum of gross value added (which is the production value of all sectors) and net taxes. The latter is virtually indirect taxes less subsidies. This component has been very high during the year which has held to this high growth in GDP. GVA growth for the year was 6.9% and the trend has been that GDP growth is normally 0.2-0.3% point higher. But this time it has been 0.7% which has pushed up growth. This can be said to be the surprise factor.

In fact for the third quarter the tax effect is even sharper. The GVA growth was 6.5% while GDP growth was higher by 1.9% at 8.4%. Hence, this means that collections have been very good going by the GST numbers released every month. Also the subsidies have been controlled for both food and fertilisers which has caused a smart increase in net tax collections. It can be surmised that there could be some savings on the budgeted subsidies by the end of the year.

The other encouraging aspect of the GDP numbers is the investment ratio. This is typically the gross fixed capital formation number which is expressed as percent of GDP. It has risen from 29.6% in Fy22 to 30.7% in Fy23 to 31.3% in FY24. This is good news as the capital formation rate has been lacklustre for the last few years and crossing the 30% mark is an achievement.

The GDP growth numbers have come as a major surprise given that most forecasts for the year were less than 7% while the first advance estimate spoke of 7.3%. In fact, the RBI had forecast Q3 growth at 6.4% in December and hence a number of 8.4% was a pleasant shock.

While this picture is encouraging, there are some contrarian signs when indicators are looked at separately. For example, investment seems to be still lagging from the point of view of the private sector. Investment announcements have been lower this year. The debt market has been skewed more to NBFCs raising funds while bank credit has been dominated by services and retail segments. Higher investment has been undertaken by companies in the infra related sectors like cement and steel and is not broad based.

Date on proxy indicators like two-wheelers or tractors show that rural demand is still lagging and the lower performance of the farm sector is partly responsible for this phenomenon. Inflation has been high averaging over 5% and cumulating to over 20% in last 3-4 years which has eroded purchasing power. Here, the growth in real consumption for the year was just 3% while nominal growth was around 8%. One is still not sure if the employment numbers are better across the board which should ideally go along with higher GDP growth. A clear picture will emerge by the end of this fiscal year.

Hence while interpreting the headline growth number of 7.6%, these other factors also need to be kept in mind. Starting from a point of strength one can see the path for FY25 being fairly clear. In the absence of an adverse monsoon and global commodity prices being stable, growth should be on the upward path and we should be able to clock another growth rate of 7%. This is of course lower than the trajectory of 8% plus that we have maintained in the past, but it could be assumed that we would get there steadily in the next couple of years thus making the dream of reaching the $ 5 trillion mark easier.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal

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