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The story behind the big GDP-GVA gap

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Photo: iStock

Yet again, two measures of India’s economy— ‘gross value added’ and ‘gross domestic product’—have grown at widely different paces. While change in GDP significantly lagged the change in GVA in FY21, the story was opposite in FY22, says data released Tuesday. Mint explains

Yet again, two measures of India’s economy— ‘gross value added’ and ‘gross domestic product’—have grown at widely different paces. While change in GDP significantly lagged the change in GVA in FY21, the story was opposite in FY22, says data released Tuesday. Mint explains:

What is the difference between GVA & GDP?

Gross value added (GVA) adds up the value of all goods and services produced in an economy after deducting the input costs, while gross domestic product (GDP) is a measure of the country’s national income by adding up the expenditures in the economy. The main difference is that the latter includes net taxes and removes subsidies, which is why the two metrics can differ in years of sharp taxation or subsidy changes. While GDP is the internationally-accepted measure of overall economic growth in the country, GVA provides sector-wise details of economic activity from the production side.

What explains the gap between GDP & GVA?

In FY21, GDP growth lagged GVA growth by 180 basis points, the first such phenomenon under the current series, as the Centre brought onto the books several years of dues owed to the Food Corporation of India. Food subsidy costs ballooned in one go, in a year when tax collections were severely hit due to the lockdown. This created a massive gap between the GDP and GVA. In FY22, however, tax collections grew at a rapid pace (28%) due to quick recovery in economic activity, while subsidies, despite remaining elevated, fell by over a third due to the base effect. This resulted in GDP growing 8.7%, while GVA rose just 8.1%.

The right measure
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The right measure

Which is a better metric to gauge economic growth?

Both GDP and GVA serve their own purpose in understanding the economic momentum in the country. While GDP is the official measure of economic growth in the country, GVA may prove to be a better metric under exceptional circumstances as in the case of the last two years. Moreover, GVA is where you go to if you need to gauge output of specific sectors.

Was the GDP & GVA gap there before FY21?

Between FY13 and FY17, the GDP growth always exceeded GVA growth rate, but never by more than 30 basis points. This gap grew to 60-70 bps in FY18 and FY19, thanks to strong tax collections post demonetisation, while subsidies fell on a year-on-year basis. In FY20, however, GDP growth came in lower than GVA for the first time, though only by 10 bps, as tax collections grew 3%, and subsidies rose by 18%. Overall, GDP tends to print higher than GVA as tax collections often remain bigger than subsidy pay outs.

Will the GDP-GVA divergence continue?

Skyrocketing price pressures have forced the Centre to announce a slew of measures from tax cuts to additional subsidies, both of which will weigh on GDP print in FY23. Additional subsidies worth 2.0 trillion would inflate GVA, while fuel tax cuts, which are expected to cost at least 85,000 crore, may pull GDP down, unless tax revenue from other channels bridge the gap. The real impact, however, will not be known until the statistics ministry comes out with the second advance estimate of the GDP next year.

 

 

 

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