GDP numbers: Back to positive, but which number to trust?

March 2, 2021 6:00 AM

The govt’s drive to repay past dues is distorting GDP numbers. GVA, which grew more strongly, should be a better indicator of growth over this period

gdpTaking various factors into consideration, it said, "the projection of real GDP growth for 2021-22 is retained at 10.5 per cent consisting of 26.2 per cent in Q1, 8.3 per cent in Q2, 5.4 per cent in Q3 and 6.2 per cent in Q4."

By Pranjul Bhandari, Aayushi Chaudhary & Priya Mehrishi
The October to December quarter (Q3FY21) real GDP grew 0.4% y-o-y (consensus: 0.6%, HSBC: 1.8%) versus a contraction of 7.3% y-o-y in the previous quarter. Nominal GDP grew 5.3% y-o-y. GVA grew a tad better at 1% y-o-y (-7.3% in 2Q), and 28% q-o-q sa annualised (101% in 2Q). In its second advance estimate, the statistics office has pegged FY21 GDP growth at -8% y-o-y, a tad worse than the -7.8% estimated earlier. GVA growth, on the other hand, was revised up to -6.5% y-o-y vs -7.0% previously.

There are a few issues with the data, which need to be resolved, in our view:
Why is there such a sharp difference between GDP and GVA growth, both in the December quarter (0.4% versus 1%) and also the full year advance estimate (-8% versus -6.5%)? And between GDP and GVA, which is a better indicator of recovery?
Why was the December-ending quarter GDP growth much weaker than expected (0.4% versus our expectation of +1.8%)?

We think because of the following:
Payment of past year food and fertiliser dues may be distorting GDP estimates: We know that GDP = GVA + indirect taxes – subsidies. We also know that indirect taxes grew sharply in the December quarter (GST grew +8% y-o-y; central government indirect taxes grew 33% y-o-y). So for GDP to grow at a much slower pace than GVA, subsidies would have had to grow rather strongly. But why would that be?

Because the budget on February 1 made it all too clear that over two years, the government intends to pay off past accumulated dues to intermediaries for food and fertiliser subsidies (for instance, it intends to pay `1.7tr to the Food Corporation of India in FY21). Repayment of some of these bloated up subsidy growth, thereby depressing the December quarter GDP growth, in our view.

And the impact will be felt in the full-year estimates. The statistics office released updated FY21 advance estimates for growth, pegging GDP well below GVA growth (-8% versus -6.5%).
And here is the next big surprise: Working out the government’s March quarter growth estimates (from the full year advance estimate) shows a 1.1% contraction in GDP alongside a 2.5% expansion in GVA. Again, reflecting the plans to repay further dues over the next few months. But also implying that India will go back into GDP contraction, which sits oddly with the fact that many activity indicators have improved over January and February.

Which number then better reflects economic growth? GDP or GVA. With GDP getting impacted by payment of previous-year subsidy dues, we think GVA will better reflect economic growth, not just in FY21 but also in FY22 (when some more of the past year dues are scheduled to be paid off).

Turning to GVA growth for the December quarter shows that the miss from our expectation was not as large but still significant (actual: 1%; HSBC: 1.7%). What explains that?

One, lower than expected manufacturing growth: While manufacturing growth at 1.6% y-o-y was in line with IIP Manufacturing, we had expected it to be higher given corporate results for the quarter have been strong. It is likely that GVA manufacturing will be revised up subsequently. In fact, the statistics office warned that given pandemic led data collection disruptions, growth estimates are “likely to undergo sharp revisions”.

Two, weaker than expected government spending: While central government spending has picked up, it did not seem very buoyant in the GDP numbers. There could be two reasons—state spending remains weak, and a part of the rise in central government spending is just repayment of past dues.

On the GVA front, while manufacturing disappointed and public services growth remained in negative territory, agriculture was resilient, and construction and finance rose quickly into the positive growth terrain. While the trade and transport category improved, it remained negative, as much of it includes high-touch services.

On the GDP front, private and government consumption remained negative. Investment rose into positive territory (in line with construction data), but net exports were a drag on growth as imports picked up sharply after the lockdown.

The rebound in the last few months was driven by pent-up goods demand. Growth over the next few months could be driven by pent-up services demand, particularly with the vaccine rollout progressing. We expect GVA to grow by 10.7% y-o-y in 2021 vs -6.3% in 2020 (calendar year).

Having said that, risks cannot be ignored. Over the next few months, the sudden surge in new pandemic cases in a few states, higher oil prices, and rising yields need to be monitored.

Beyond that, we think the success with government stake sales, the reintroduction of the Insolvency and Bankruptcy Code, the details of the Production Linked Incentive scheme, and the continuation of social welfare spending will determine whether India is able to translate the ongoing cyclical uptick into structural growth gains.

Bhandari is chief India economist, Chaudhary is economist and Mehrishi an Associate, HSBC Securities and Capital Markets (India) Private Limited

Excerpted from India GDP (Oct-Dec, 2020) report, HSBC Global Research (February 26)

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