The latest gross domestic product (GDP) estimates of the National Statistical Office (NSO) have created a peculiar situation. The NSO has not changed the forecast of GDP growth for the year, keeping it at 7%; hence, it is a case of status quo vis-a-vis the first estimate provided in January. Ideally, this should not have merited any attention. But these estimates also came with growth estimate for the third quarter, which was 4.4%. This has ignited concern in some sections, with talks of a slowdown—which, in turn, raises questions about the attainment of the 7% growth. Further, the government has assured that the lower growth in Q3 was due to base effect, given the FY22 numbers were revised upwards. In fact, it is believed that the growth rate of 7% for FY23 will be exceeded.
The reason why discussion has turned fuzzy is the following. In January, the NSO came out with a forecast of 7% for the current fiscal year, with growth of 13.5% and 6.3% in the first two quarters—a cumulative growth of 9.7% for the first half. This meant that to achieve 7% for the entire year growth had to average 4.3-4.5% in the second half, with each of the quarters witnessing a similar range. In fact, the Reserve Bank of India (RBI) had a forecast of 6.8% for the year, with the third- and fourth-quarter growth estimated at 4.4% and 4.2%, respectively. At that time, interestingly, there were no red flags raised, and it was assumed that the slowdown in the pent-up demand and higher base effects would bring rates to a modest level. Here, it is interesting to note that the RBI has projected a growth of 6.4% for FY24, with a tapering again being witnessed from 7.8% in Q1 to 6.2%, 6% and 5.8%, respectively, in the subsequent quarters.
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Logically, the story cannot have a different interpretation as everything is on expected lines. The problem these days is that there are several high frequency indicators coming in, often presenting contrasting pictures. For example, if one looks at the PMI indices for both manufacturing and services, there are positive signals. These indices have been impressive in all the months, with the numbers above 55 after July. And PMI is a comparison relative to the previous month. If these indices are moving up, then it means that the economic mood is improving progressively. Hence, it is difficult to match these numbers with the economy slowing down.
Similarly, if one looks at the GST collections, the impression gleaned is that consumption is up as the tax is based on consumption. The government has mopped up around Rs 1.5 lakh crore every month compared with an average of Rs 1.24 lakh crore last year, which means people must be spending a lot. This also gels well with the PMI numbers, especially services that has lately touched a high.
Yet, when one looks at growth in consumption, it was just 2.1% in Q3. But, it was 8.1% in nominal terms, which means that a significant part was driven by higher inflation. This also means that the pent-up demand was limited, since people did consume more in real terms, but it was much lower than the nominal number due to higher prices. This fits in with the story of core CPI inflation that has consistently been above 6% this year. It was above 7% for household goods and personal care products consistently. This also fits in with the IIP growth number for consumer goods, which was just 0.6% for the first 9 months.
Further, e-Way bills generated have been increasing every month, indicating resurgence in activity as they reflect the goods transported across the country. In the last five months, 82 million such bills were generated on an average per month, while it was 79 million for the year so far. In FY22, it was 64 million. Yet, this does not get reflected in the GDP growth numbers.
There is, thus, a need to reflect on how much do these indicators really reflect economic activity. The GST collections and e-Way bills could be rising due to greater formalisation in the economy. This is why more activity is being recorded and revenue earned by the government. But, this only partly reflects the economic-activity levels. Maybe, once the formalisation process is complete, a clear picture will emerge here. The PMIs, too, seem to have limited relevance from the point of view of growth. The same can be said for the IIP and core-sector growth numbers, which have been impressive at 5.4% and 7.7%, respectively, for nine and ten months.
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The conundrum lies in the fact while these micro data-points contribute to the whole, they are not reflective of the GDP in a definitive manner, given the weights of these variables. In fact, where proxies lie in the use of corporate financial data, there is a better fit since these numbers directly contribute to the GDP numbers. There are exceptions; for the financial sector, banking profitability is not used but the growth in business. In construction, data on steel is used, while, for transport, the e-Way bills do not matter, but railways and port business come in. Therefore, while PMIs and GST tell us something, they do not cover the whole story. That’s why these anomalies will persist, and linking them will, at best, be a broad guess. On all counts, the story for FY23 looks stable, and there may be less room for cynicism.
The writer is chief economist, Bank of Baroda
Views are personal