The robust 8.4% real GDP growth recorded in the third quarter stands in stark contrast to the sobering reality of household consumption and income trends. Recent data from the national expenditure survey, released after an 11-year hiatus, reveals a modest 3% growth in real consumption over the past 11 years, while the Periodic Labour Force Survey (PLFS) indicates stagnant real incomes over the past four years. Additionally, most consumer companies have reported lackluster demand, further underscoring the disparity between GDP growth and actual economic conditions.
The divergence between GDP growth and underlying economic indicators has become more pronounced in the third-quarter data. This is evident in several factors: a) a significant contribution from the discrepancy component, b) a notable increase in net indirect taxes leading to an expanded expenditure GDP, and c) an imbalanced reduction in imports compared to the decline in consumption.
The latest projection for nominal GDP in FY24, standing at INR 293.9 trillion, marks a decline of 2.6% compared to the FY24 budget projection and a decrease of -0.9% from the first advance estimate.
In headline news, the Q3FY24 GDP growth of 8.4% Year-on-Year exceeded the Central Statistics Office’s projection, leading to an upward revision in the second advance estimates (AE) for the full year FY24 to 7.6% YoY, up from the initial 7.3% YoY estimate in January 2024.
However, when considered on a seasonally adjusted (sa) basis, real GDP saw a modest quarter-on-quarter (QoQ) increase of 0.8%, indicating an annualized growth rate of 3.1%. Overall, the average QoQ rise during Q1-Q3 FY24, at 1.7%, translates to an annualized growth rate of 4.1%.
Core GDP, which excludes discrepancy or unaccounted portions, experienced a year-on-year (YoY) growth of 4.7%, representing only 55% of the headline GDP growth. Furthermore, the Q3 seasonally adjusted quarter-on-quarter (QoQ sa) growth of 0.9% suggests an annualized Q1-Q3 FY24 core GDP growth averaging at just 3.2%. Thus, despite the strong headline GDP print, there are indications of fading growth momentum.
A closer look at the expenditure side reveals that the apparent strong growth is primarily driven by a significant contraction in imports, leading to a disproportionate decline in the external deficit and thereby reducing the drag on GDP growth.
On an annualized basis, imports witnessed a sharp contraction of 22% in Q3, while exports saw a modest expansion of 0.9%. The decline in imports is attributed to a contraction in domestic demand. Overall consumption, including private (decline of -0.7% QoQ sa) and government (decline of -7.9% QoQ sa), contracted by 1.8% QoQ sa, annualizing into a 7% contraction.
The growth in real exports (0.9% sa annualized) indicates that despite the slowdown, global demand conditions remain relatively stronger compared to domestic demand.
Growth in gross capital formation decelerated to 10.6% from 11.6% in 2QFY24 but remained flat sequentially.
On the output side, real Gross Value Added (GVA) growth experienced a notable deceleration from 8.2% Year-on-Year (YoY) in Q1 FY24 to 6.5% YoY in Q3 FY24. Sequentially, it only saw a marginal growth of 0.1% Quarter-on-Quarter (QoQ) seasonally adjusted (sa) and has remained stagnant for the past two quarters.
Agriculture GVA contracted by 0.8% YoY in Q3 FY24, sustaining a sequential average decline of 0.6% QoQ sa for three consecutive quarters.
The industrial sector decelerated to 10.4% YoY and displayed signs of sequential slowdown, contracting by 0.3% QoQ sa, with the manufacturing sector experiencing a 0.5% QoQ sa contraction.
Meanwhile, the services sector expanded by 7% YoY and 1% QoQ sa, with trade and financial services showing sequential expansion.
The contrasting trends of rising real GDP growth and a notable deceleration in real Gross Value Added (GVA) growth highlight the significant increase in the impact of net indirect taxes on the expenditure side.
Net indirect tax/GVA ratio stood at 9.7% in Q3, marking a sharp increase from 7.8% a year ago and 8.9% in the previous quarter. In absolute terms, net indirect taxes witnessed a 32% Year-on-Year (YoY) growth and a 12.6% Quarter-on-Quarter (QoQ) growth.
The elevated net indirect taxes continue to exert pressure on overall domestic demand, which is already being weighed down by the decline in real household incomes.
Consequently, although headline GDP growth appears robust, it conceals the contraction in domestic consumption demand. This suggests that private capital expenditure may have remained subdued, indicating a continued dependence on government expenditure. The statistical adjustment resulting from the enlarged discrepancy component has led to core growth trending much lower at 4% over the past six quarters.
The sustainability of even this core growth is questionable, particularly as the interim budget for FY25 has reduced growth projections in the infrastructure sector (roads, railways, and defense) to 5.2%. Moreover, fragile support from the disproportionate contraction in imports relative to the decline in domestic demand further complicates the economic outlook.
(Sources: The Wire)