India's surprising GDP growth rate leaves economists puzzled. Here's why

A Mint poll by 17 economists had projected GDP growth at 6.6%.
A Mint poll by 17 economists had projected GDP growth at 6.6%.

Summary

While GDP has shown an impressive rise, the sharp slowdown in GVA growth could be worrisome.

India’s GDP growth surprised with a six-quarter high of 8.4% in the quarter ended December, beating street estimates by a huge margin. While the headline number may prove to be a shot in the arm for the Narendra Modi government, which will seek a third term in the upcoming General Elections, the details have perplexed economists.

A Mint poll by 17 economists had projected GDP growth at 6.6%.

Not only is the growth in the December quarter high, but the figures for the two preceding quarters have also been revised upwards—mainly due to a downward revision in the previous year's figures, which lowered the base. The GDP growth rates for April-June and July-September have been revised upwards to 8.2% and 8.1% respectively, up from the earlier figures of 7.8% and 7.6%. The revisions in numbers are a general practice but their impact varies from year to year.

While GDP has shown an impressive rise, the sharp slowdown in gross value added (GVA) looks worrisome. GVA growth was just 6.5% in October-December, down from 7.7% the previous quarter. Gross value added is GDP minus net taxes on products.

“The October-December data on India's growth threw up a divergent trend, with the GVA growth moderating broadly on expected lines and the GDP expanding higher than anticipated," said Aditi Nayar, chief economist, ICRA. “This wide gap followed from a surge in the growth of net taxes to a six-quarter high 32% in this quarter, which is unlikely to be sustainable," Nayar added.

On the expenditure side, investments were the most rapidly growing component of GDP, contrasting the low single-digit growth in private final consumption expenditure and a contraction in government final consumption expenditure.

“Going forward, the most critical aspect to watch out for will be a broad-based improvement in consumption growth. The other critical aspect would be a meaningful improvement in private investment," said Rajani Sinha, chief economist, CareEdge.

Sector-wise, while manufacturing and construction recorded strong growth in the December quarter, the rise was smaller than the previous quarter. Trade and hotels was the only segment that saw an improved growth rate compared to the previous quarter. And, as economists had warned, agriculture slipped into the contraction zone.

In terms of share in overall GDP, agriculture remained one of the top three contributors. Financial services once again remained the top contributor, followed by trade and hotels.

Overall, the downward revisions in the GDP data for 2022-23 and the boost from net taxes in the December quarter have lifted growth in the first nine months of the year. As such, the statistics ministry now sees GDP growth for the full year 2023-24 at 7.6%, higher than 7.3% that it had estimated in January and 7.0% growth estimated by the Reserve Bank of India (RBI).

“Today's print suggests growth is moving faster than expected by the RBI, which means the central bank will see little urgency to cut rates while the MPC awaits for comfort on headline inflation," said Barclays in a report on Thursday.

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