By Saugata Bhattacharya

India’s Q4 FY24 GDP growth printed at (an unexpectedly high) 7.8% year-on-year (y-o-y). Together with an average 8.3% growth during Q1-Q3, this took the full FY24 growth to 8.2% y-o-y (accelerating from 7% in FY23). This was a standout performance, given the International Monetary Fund estimates that world GDP growth in the calendar 2023 (largely overlapping India’s FY24) was only 3.2%.

This robust growth comes against the backdrop of global investors’ rising confidence in India’s development story. Around a week ago, Standard & Poor’s upgraded India’s sovereign credit ratings outlook from the earlier stable to positive, a precursor to an eventual ratings upgrade.

Compared to GDP, gross value added (GVA) growth was a more modest 7.2%. The growth gap between the two entities (0.93 percentage points) was the highest by far in the entirety of the 2012-13 base GDP series (except the Covid-19 lockdown year of FY21). By definition, GDP is GVA combined with indirect taxes (GST, excise, etc.). Broadly, GVA measures the production side of national accounts (and hence is a more meaningful measure of economic activity), and GDP measures the consumption side. This large divergence in the two growth measures arose due to high collections of indirect taxes (GST, excise, etc.), but even more from significantly lower spends on subsidies. Official data shows that total subsidies disbursed from the Centre in FY24 were `4.14 trillion, as opposed to `5.31 trillion in FY23. Both food and fertiliser subsidies were significantly lower. Subsidies from state governments were also likely to have been moderate. This divergence is unlikely in FY25.

A surprise in the FY24 growth was the manufacturing segment (6.5%, up from an average of 2.9% over FY20-23). Some of this was due to the base effect of a low 1.3% in FY23. In the last quarter, however, manufacturing growth printed at 8.9% y-o-y, lower than the average 12.9% in Q2-Q3 FY24. It was expected to be even lower, given the underlying corporate and industrial metrics used to forecast manufacturing and services growth.

For proxying formal sector growth, quarterly and annual financial results of public-listed manufacturing corporates are collated, which are then adjusted for inflation using mostly wholesale price index (WPI) inflation. GVA is replicated using profit before tax (PBT) plus employee earnings, reflecting value added in corporate operations. A proxy for the informal sector, micro and small enterprises is the index of industrial production (IIP).

In Q4 FY24, both of these metrics had slowed considerably compared to the third quarter. IIP manufacturing growth had dropped to 4.5% from 5.5% in the third quarter and 6.8% in the second quarter. Manufacturing PBT had also slowed in the last quarter. However, offsetting these slowdowns, the inflation gauge (WPI), used to derive the corresponding real (volume) growth from the financial results, dropped to -1.1% in the last quarter (compared to -0.9% in the third quarter), boosting real growth. More generally, reflecting the average WPI disinflation of 0.64% in FY24, the difference between nominal and real GVA growth in FY24 was a mere 0.7 percentage points against an average 5.1 percentage points for the previous 11 years. This too will revert to more normal in FY25.

There has also persisted a criticism of the demand-side numbers, particularly the magnitude of “discrepancies” in the GDP accounts. Arguments of analysts pointing out divergences of “core” GDP growth from headline growth are not convincing. Output growth, for instance, has been better allocated among the demand-side segments; the residual (“discrepancies”) in FY24 was 0.7% of the GDP, a magnitude last seen in FY16.

As has been widely noted, private consumption remains moderate, if not weak. In the nine years prior to FY21, the share of private consumption had averaged 56.2% of real GDP, increasing to 57.9% over FY22-FY24 (in nominal terms, these shares were 58.4% and 60.7% respectively, implying that prices of consumables had been higher in the post-Covid years). The share of fixed capital formation (i.e. investment) rose to an average 33.8% of real GDP over FY22-24 (from a low of 30.7% in FY16). Do note that the share of investment in GDP was also an average 33.7% of GDP during FY12-14.

Private consumption growth has also been revised up to 4% y-o-y (from the earlier 3.2% estimated at end-February). Private consumption has also grown more slowly over FY21-24 (4.6% average), as compared to 6.7% over FY13-20. This growth has been overshadowed by investment growing at 8% in the last four years. This was a reversal of growth (relative to private consumption) during the previous seven years (5.5%). Note that strong investment growth in the last three years is also mirrored by high construction sector growth (average 9.1% over FY21-24).

Both the Reserve Bank of India and the ministry of finance have forecast 7% y-o-y growth in FY25; multilateral institutions are forecasting 6.6-7%. These are early days, with the possibility of adverse shocks over the year including volatile commodity prices with an expected China recovery. Yet, there are grounds for optimism. One, India’s economy remains resilient with likely policy stability. Corporate balance sheets are strong, with reasonable expectations of a start of a capex upcycle. The current account deficit is expected to remain stable, with limited vulnerability to external shocks. Second, global volatility and uncertainty is expected to reduce in 2024. “Soft landings” in most G7 markets are now the default scenarios. Inflation is coming down, even if it is doing so in a bumpy and reluctant manner, which will open the door for G7 central banks to cut policy rates, resulting in investor “risk on” sentiments for emerging markets, with financial capital inflows.

The author is an economist

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