GS Paper III

News Excerpt: The difference between GDP and GVA Growth Rates widened to 190 basis points in Q3, a 10-year high.

More details about the news:

•  India’s Gross Domestic Product (GDP) growth rate surpassed expectations (of  6.5%) to rise to a six-quarter high of 8.4% in the third quarter (October-December) of 2023-24, data released by the National Statistical Office (NSO).
•   The Q3 GDP helped push the estimate for the full year to 7.6% in the second advance estimates, from the 7.3% estimated in the first advance estimates released in January.
•  While there was an improvement in manufacturing, mining, construction, trade, hotels, transport and communication, and services related to broadcasting, the agriculture sector recorded a contraction in Q3.

•  There was a sharp divergence in the growth rates based on GDP and Gross Value Added (GVA), which has led some economists to suspect that GDP may have been overstated.
• While GDP for Q3 was 8.4%, GVA growth recorded 190 basis points (from 40 basis points in the previous quarter) lower at 6.5%. GDP is arrived at by adding product or indirect taxes and excluding subsidies to GVA, which measures national income from the output side.
• Another factor that seems to have contributed to real growth being overstated is the lower-than-usual annual GDP deflator. It is seen growing by 1.4% in FY24 as against 6.8% in FY23, reflecting the deflation in the wholesale price index (WPI) used to calculate it.
•  The deflator measures changes in prices of all the goods and services produced in an economy and thereby helps compare the levels of real economic activity from one year to the next.

Reasons for divergence between the two measures of growth, GVA, and GDP:

•  Divergence mainly driven by Net Taxes: As per Axis Bank, the divergence is at a 10-year high, driven mainly by a rise in net taxes. Net taxes rose by 32% year-on-year in Q3 FY24 in real terms. Net taxes are calculated by adding product taxes and excluding subsidies.
• The fluctuation in net tax collections has added a lot of volatility in the GDP print in Q3. Instead, GVA would be a better metric to look at while assessing growth as it’s not impacted by fluctuation in net tax collections.
• Impact of Subsidy Reduction on Divergence: As per Government officials, the divergence between GVA and GDP rates was mainly due to a sharp fall in subsidies in the quarter because of lower payouts on fertilizer subsidies.
• As per the latest Controller General of Accounts (CGA) data for April-January, urea subsidy was 25% lower than the year-ago period at Rs 1.05 lakh crore. Payouts by the central government for total major subsidies were lower by 21% during the same period.
•  Divergence Extended to Full Financial Year: The divergence in GVA and GDP growth rates was also seen for the full financial year. GVA is expected to grow at sub-7%, with an estimated rate of 6.9% in FY24 as against 6.7% last fiscal (earlier estimate was 7.0%). This compares with GDP of 7.6% in FY24 as against 7.0% in the previous financial year.

Way Forward:

•  Sustaining economic growth requires addressing the sharp divergence in GDP and GVA, emphasizing stable fiscal policies, and closely monitoring net taxes.
•  Prioritizing consumption growth and private investments is crucial for economic resilience.