Beyond the Boom: Unveiling the Nuances of India's Economic Growth

If there is one economy that’s outperforming any other today, it is the Indian economy. Often cited as the fastest-growing economy in the world, the Indian economy has not only met expectations but has exceedingly surpassed them. In the third quarter of FY24, it achieved a staggering growth rate of 8.4% compared to the predicted 6.6%, a six-quarter high. At a time when major economies are crumbling, this is certainly a significant milestone, one that has convinced reputed economic organisations around the world to raise predictions of India’s economic growth rate for this financial year. 

All these numbers certainly sound great for India’s future, especially for Prime Minister Narendra Modi, who is seeking to win a third term in the upcoming elections. In fact, these numbers are so surprising that some economists believe they may be too good to be true. A recent article published by Bloomberg (an American-based media company) claims that “India’s blowout GDP was based on data distortion that masks slowdown”. Since then, several questions have been raised about the validity of GDP itself as a measure. Suddenly, GVA is a better measure. 

Before we proceed, let's understand some key economic terms. GDP (Gross domestic product) is a measure of economic growth made up of the following components: consumption, investment, government spending and net exports. The GVA (Gross value added), however, shows how well a country is really performing. Essentially, it is GDP excluding indirect taxes and subsidies. 

So if India is really doing so well, both GDP and GVA should’ve risen simultaneously, right? That’s where the scrutiny began. Economists expressed some surprise that GVA growth in Q3 slid to just 6.5% from revised estimates of 8.2% and 7.7% in Q1 and Q2, respectively. This led to economists believing that an unexpected drop in subsidies was perhaps the main reason for the unexpected surge in GDP, giving an artificial boost to the net indirect taxes category that is used to calculate GDP. While indirect taxes grew just 0.7% from the previous year, subsidies plunged almost 54%. This was certainly a major contributor towards the sudden increase in GDP. 

This divergence indicates an uneven economic growth, with investment racing ahead of consumption. Private consumption growth was relatively subdued at 3.5% in Q3, suggesting that the domestic demand recovery is not as robust as the GDP figure might imply. The escalation of geopolitical disputes and flailing external demand mandate a strong private consumption rate for sustainable investment growth. 

A decline in government spending by 3.2% in Q3, from a 13.8% growth in Q2, further complicates the picture. The agriculture sector witnessed a contraction of 0.8% in GVA growth in Q3, down from 1.6% in Q2, reflecting the sector’s challenges despite the overall economic growth.

This gap is exacerbated by the sub-optimal growth in private capex, that is, the investments that private companies make in acquiring and maintaining assets. The manufacturing and construction sectors in India showed impressive growth rates of 11.6% and 9.5% YoY, respectively, supported by public capital expenditure (capex). This indicates strong government investment in infrastructure, which can boost GDP figures.

The divergence between GDP and GVA in India during Q3FY24 highlights the complexities of economic recovery and growth. While headline GDP figures suggest robust economic performance, the GVA figures, along with sector-specific data, reveal an uneven growth pattern. This divergence, driven by factors such as indirect tax growth and varying sectoral performances, underscores the importance of looking beyond GDP to understand the real state of the economy. The Indian economy’s reliance on public capex for growth, with subdued private consumption and capex, points to the need for balanced and sustainable growth drivers moving forward.