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Strong real GDP growth of 8.4% for the third quarter contrasts with the grim reality of the household consumption and income situation. The last national expenditure survey (2022-23), released after a delay of 11 years, shows that real consumption grew modestly at 3% over the past 11 years, and data from the Periodic Labor Force Survey (PLFS) indicate stable real incomes in the last four years. Additionally, most consumer companies have shown lackluster demand.
What is not surprising is that the persistent discrepancy has been accentuated in the third quarter data and is reflected in a) the large contribution of the discrepancy component, b) a sharp increase in net indirect taxes that translates into an increase in spending of GDP, and c) a disproportionate drop in imports in relation to the drop in consumption.
Importantly, the latest FY24 nominal GDP projection of INR 293.9 trillion is a decline of 2.6% from the FY24 budget projection and -0.9% from to the first advance estimate.
For headlines, Q3FY24 GDP at 8.4% YoY was higher than the Central Statistics Office projection, prompting an upward revision in the second advance estimates (AE) for the entire FY24 with 7.6% year-on-year compared to the first AE. 7.3% year-on-year (Jan’24).
But on a seasonally adjusted (sa) basis, real GDP increased modestly at 0.8% quarter-on-quarter, implying annualized growth of 3.1%. Overall, the average quarter-on-quarter increase during Q1FY24 of 1.7% translates to annualized growth of 4.1%.
Core GDP (GDP excluding the discrepancy or unaccounted portion) grew 4.7% year-on-year, or just 55% of overall GDP growth. Furthermore, along with the 0.9% q-o-q sa in Q3, annualized underlying GDP growth between Q1 and Q3 FY24 is averaging just 3.2%. So, despite the good headlines, growth momentum is fading.
The details of the spending side reveal the fact that the supposedly strong growth comes mainly from a sharp contraction in imports, resulting in a disproportionate decline in the external deficit, thus reducing the drag on GDP growth.
On an annualized basis, imports contracted 22% in the third quarter, while exports rose modestly by 0.9%. The decrease in imports is the result of a contraction in domestic demand. General consumption, which includes the private sector (-0.7 quarter-on-quarter sa) and the public (-7.9% quarter-on-quarter sa), contracted 1.8% quarter-on-quarter sa, annualizing to a contraction of 7%.
The growth of real exports (0.9% annualized) indicates that, despite the slowdown, the conditions of global demand remain better than those of domestic demand.
Gross capital formation growth has slowed to 10.6% from 11.6% in 2QFY24. But it remained stable sequentially.
On the production side, real GVA growth saw a marked slowdown from 8.2% YoY in Q1FY24 to 6.5% YoY in Q3FY24. 0.1% quarter-on-quarter and remained stable since the last two quarters.
Agricultural GVA contracted 0.8% year-on-year in Q3FY24 with a sequential average decline of 0.6% quarter-on-quarter that continued for three quarters.
Industry slowed to 10.4% year-on-year and also showed signs of sequential slowdown as it contracted 0.3% q-o-q sa and the manufacturing sector contracted 0.5% q-o-q sa.
The services sector expanded 7% year-on-year and 1% quarter-on-quarter as business and financial services expanded sequentially.
The contrasting rise in real GDP growth and a sharp slowdown in real GVA growth mark the substantial rise in the incidence of net indirect taxes on the expenditure side.
Net indirect tax/GVA of 9.7% in the third quarter was much higher than 7.8% a year ago and 8.9% the previous quarter. In absolute terms, net indirect taxes grew by 32% year-on-year and 12.6% quarter-on-quarter.
Therefore, high net indirect taxes continue to affect overall domestic demand, which is already being dragged down by falling real household incomes.
Therefore, at first glance, although overall GDP growth appears robust, it camouflages the contraction in domestic consumption demand. Therefore, it is reasonable to assume that private capital spending would have remained languid, meaning continued over-reliance on government capital spending. The statistical boost from the widened discrepancy component has meant that underlying growth has trended much lower at 4% over the past six quarters.
The sustainability of even core growth is suspect as the interim budget for FY25 has reduced growth in infrastructure sector allocation (roads, railways and defense to 5.2%) and fragile support from disproportionate contraction of imports in relation to the decline in domestic demand. .
Dhananjay Sinha is Co-Head of Securities and Head of Strategy and Economics Research at Systematix Group.