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GROWTH CONUNDRUM

To accurately understand India’s economy right now, don’t look at the GDP

india-gdp-economist-growth
Reuters/Danish Siddiqui
Measuring growth, the right way.
  • Saugata Bhattacharya
By Saugata Bhattacharya

Chief economist, Axis Bank

Published Last updated This article is more than 2 years old.

A sense that economic activity had slowed in the third quarter of the 2016 fiscal, after signs of modest revival earlier in the year, was partially validated by the advance estimates of GDP for the year. The growth has indeed slowed compared to the previous quarter.

The government publishes data for two measures of activity: gross value added (GVA) and GDP. GVA is a better reflection of economic activity, compared to GDP—which is GVA plus indirect tax collections minus subsidy payments. The GVA growth for fiscal 2016 is estimated to be 7.3%, which is close to both the recent Reserve Bank of India forecast (7.4% with a probability of being lower) and an earlier finance ministry review (7-7.5%).

Do these numbers “look right”, compared to the sense of activity on the ground? They do.

Since GVA in the new methodology resembles more a profit metric than sales, the trends of quarterly results in Q3 of the 2016 fiscal for manufacturing and services companies is in line with the GVA prints. For construction, not so much, but this is probably due to the limited number of construction companies which report results.

From the demand side, private consumption in 2016 is still projected to grow well at 7.6%, up from 6.2% the previous year, suggesting that consumer demand is stronger than perceived. However, the quarterly breakup for consumption casts some doubts on this magnitude; the implied fourth quarter consumption growth is projected  to rise almost 12% compared to a year ago, doubling from an average 6% in the first three quarters. The concern that the Q4 consumption growth might be lower is also bolstered by an 8.5% growth in inventories in Q3, indicating a rise in unsold stocks.

For fiscal 2016 as a whole, while suggesting that companies are indeed selling more than in 2015—thereby adding less to their inventory stocks than they did last year—sales off take is still lower than production. More importantly, investment growth (fixed plant), while marginally higher at 5.3% (from 4.9% in 2015), is still weak, suggesting that more measures are needed to boost capital expenditure.

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