India’s GDP during the three months ending in December grew at 8.4 percent. This is the highest among all large economies of the world. It is extremely heartening to have the economy growing at a relatively healthy pace for three years in a row after the pandemic. It brings good cheer, and the stock markets responded resoundingly. The stock market index keeps attaining new peaks, indicating investor optimism. The slew of announcements, such as approval for setting up of 15 billion dollars of investment in semiconductor manufacturing speaks of the enthusiasm and confidence of a bright outlook for the economy.
High GDP growth and low consumption spending growth do not sound consistent
It is important to go “below the hood” to understand the significance of the headline of 8.4 percent growth for the December quarter. This is particularly so, because the news of such high growth beat all expectations by a wide margin. For instance, the Survey of Professional Forecasters on Macroeconomic Indicators, conducted regularly by the Reserve Bank of India, had predicted a GDP growth rate between 6 to 6.9 percent for this year ending in March, very recently.
The other puzzle is the gap between GDP growth rate and that of Gross Value Added (GVA) for the same quarter. The latter gives a true measure of the real value of goods and services produced and sold. The world over it is the preferred indicator of economic health.
The actual number for December quarter is nearly 2 percent higher than the annual forecast. Of course, forecasters go wrong quite often, but not by such a big margin. These forecasters are tracking the economy based on high frequency data all the time.
The other puzzle is the gap between GDP growth rate and that of Gross Value Added (GVA) for the same quarter. The latter gives a true measure of the real value of goods and services produced and sold. The world over it is the preferred indicator of economic health. The difference between GDP and GVA is usually minor and reflects the net effect of taxes minus subsidies. Indirect tax collection adds to GDP while subsidy outgo reduces GDP. These two mostly balance each other out.
Agriculture growth has fallen below zero for the December quarter
The GVA growth for the December quarter is only 6.5 percent, nearly two percent lower than GDP growth. This gap is the highest reported in the past ten years. It has been caused by a steep fall (more than 50 percent) in subsidy outgo, and a big increase in indirect tax collection. We need to probe deeper to understand whether these are one off spikes (both positive and negative) or whether such volatility will continue. The GVA growth reported for the past three quarters has been sliding down from 8.2 percent down to 6.5 now. Since the total growth rate for 2023-24 is around 7.3 or 7.5, it means that the fourth quarter ending in April will likely report a GVA growth rate below 6 percent. That data is released only by the end of May.
One more piece of the puzzle is the difference between nominal and real GDP growth. It is because of inflation, and the correction at the national level is done by the GDP deflator. This number has been reported to be just 1.6 percent indicating nearly no inflation at all
Another puzzle apart from the GDP and GVA divergence, is the growth rate of consumption expenditure. This constitutes more than 55 percent of GDP and forms the bulk. That is growing only at 3 percent and is at a multi-year low. High growth cannot be sustained without a big push from consumer spending. That in turn depends on the sentiment of consumers, their current spending and their plan for future spending (like on white goods, furniture, tourism travel, ets). Consumers feel optimistic about the future when their job prospects are bright. High unemployment rates, especially among the college educated youth can discourage consumption spending.
The recently released fact sheet on the household consumption survey gives a granular view of monthly spending on consumption. The survey came after a gap of 11 years, and over this period the growth on average has been 164 percent in rural areas, and 146 percent in urban areas. These numbers are in nominal terms i.e. they do not account for inflation adjustment. Adjusted for inflation, the real growth in consumption as per the survey works out to 40 percent for rural areas and 34 percent for urban areas, over a period of 11 years.
The overall contribution of agriculture to GDP growth this year will be below 1 percent as per latest estimates. This is worrying for various reasons, most importantly for what it means for the livelihoods and incomes of rural families
Thus, the consumption growth based on National Sample Survey (NSS) is barely 3.5 percent over a long period. Of course, there has been this well-known discrepancy between consumer spending as revealed by NSS and as revealed by the Central Statistical Organization (CSO). And this gap is still too wide. But it is important to look at the data from these two lenses, and try to get some consistency, and remove defects in measurement if any. The fact is high GDP growth and low consumption spending growth do not sound consistent.
A third aspect when we look “under the hood” is the performance of industry and the agriculture sectors. GDP can be measured from the spending side (i.e. consumption, investment, net exports and government), or it can be measured from the production side (i.e. agriculture, industry and services). When we look at the latter, agriculture growth has fallen below zero for the December quarter. This negative number is explained as a base effect, since the quarterly numbers are growth over corresponding numbers one year ago.
Consumers feel optimistic about the future when their job prospects are bright
Since that number for the December 2022 quarter was above 5 percent, and was a “high base” the present number is negative. Be that as it may, the overall contribution of agriculture to GDP growth this year will be below 1 percent as per latest estimates. This is worrying for various reasons, most importantly for what it means for the livelihoods and incomes of rural families. Industrial growth at 11 percent too is because of the “base effect” of just 0.6 percent a year ago.
Finally, one more piece of the puzzle is the difference between nominal and real GDP growth. It is because of inflation, and the correction at the national level is done by the GDP deflator. This number has been reported to be just 1.6 percent indicating nearly no inflation at all. But surely that is a gross underestimate. If GDP growth is 8.4 percent then nominal GDP growth is expected to be at least 12 or 13 percent. It was only 10 percent higher in nominal terms during the December quarter, as compared to one year ago. The GDP deflator is too low.
Whether it is the gap between GDP and GVA growth rates, or between GDP and consumption spending, or the relatively low sectoral rates, or the very low deflator, all of these point to the need to triangulate the aggregate GDP data with more granular and high frequency sectoral data. This calls for a massive overhaul of the machinery that collects data on a real time basis.