GDP Growth Numbers Do Not Square with Consumption and Income Data


The robust 8.4% real GDP growth print for Q3 contrasts the grim reality of household consumption and income situation. The latest national expenditure survey (2022-23), released after a lag of 11 years shows real consumption grew modestly at 3% over the past 11 years, and the Periodic Labour Force Survey (PLFS) data indicates flat real incomes over the past four years. Also, most consumer companies have shown a lacklustre demand.

What is not surprising is that the persisting discordance has accentuated in the Q3 print and reflects in a) the large contribution of the discrepancy component, b) a sharp rise in net indirect taxes translating into enlarged expenditure GDP, and c) a disproportionate decline in imports relative to the decline in consumption.

Importantly, the latest projection of nominal GDP for FY24 at INR 293.9 trillion is a decline of 2.6% from the FY24 budget projection and -0.9% over the first advance estimate.

For the headlines, the Q3FY24 GDP at 8.4% Year-on-Year came in higher than the Central Statistics Office’s projection thereby prompting an upward revision in the second advance estimates (AE) for the full year FY24 at 7.6% YoY vs the 1st AE of 7.3% YoY (Jan’24).

But on a seasonally adjusted (sa) basis the real GDP rose modestly at 0.8% QoQ, implying an annualised growth of 3.1%. Putting together, the average QoQ rise during Q1-Q3 FY24 at 1.7% translates into an annualised growth of 4.1%.

Core GDP (GDP ex discrepancy or the unaccounted portion) grew by 4.7% YoY, or just 55% of the headline GDP growth. Also, along with the 0.9% QoQ sa in Q3, the annualised Q1-Q3 FY24 growth in core GDP is averaging at just 3.2%. Thus, notwithstanding the strong headline print, the growth momentum is fading.

The details of the expenditure side bare the fact that the supposedly strong growth is primarily coming from a sharp contraction in imports, thereby resulting in a disproportionate decline in external deficit, thereby reducing the drag on the GDP growth.

On an annualised basis, imports contracted by 22% in Q3, whereas exports expanded modestly by 0.9%. The declining imports are the outcome of a contraction in domestic demand. Overall consumption, comprising private (-0.7 QoQ sa) and government (-7.9% QoQ sa), contracted by 1.8% QoQ sa, annualising into a 7% contraction.

The growth in real exports (0.9% sa annualised) indicates that despite the slowdown, global demand conditions are still better than domestic demand.

Growth in gross capital formation has decelerated to 10.6% from 11.6% in 2QFY24. But it remained flat sequentially.

On the output side, real GVA growth witnessed a marked deceleration from 8.2% YoY in Q1 FY24 to 6.5% YoY in Q3 FY24. Sequentially, it grew by only 0.1% QoQ sa and remained flat since the last two quarters.

Agriculture GVA contracted by 0.8% YoY in Q3 FY24 with a sequential average decline of 0.6% QoQ sustaining for three quarters.

Industry decelerated to 10.4% YoY, also showed signs of sequential slowdown as it contracted by 0.3% QoQ sa with the manufacturing sector contracting by 0.5% QoQ sa.

The services sector expanded by 7% YoY and 1% QoQ sa as the trade and financial services expanded sequentially.

The contrasting rise in real GDP growth and a sharp deceleration in real GVA growth marks the substantial rise in the incidence of net indirect taxes on the expenditure side

Net indirect tax/GVA at 9.7% in Q3 was sharply higher than 7.8% a year ago and 8.9% in the previous quarter. In absolute terms, net indirect taxes grew by 32% YoY and 12.6% QoQ.

Thus, the elevated net indirect taxes continue to impinge on the overall domestic demand, which is already being dragged down by the decline in real household incomes.

Therefore, on the face of it, though the headline GDP growth looks robust, it camouflages the contraction in domestic consumption demand. It is thus reasonable to assume that private capex would have remained languid, thereby signifying the continued overreliance on government capex. The statistical boost from the enlarged discrepancy component has meant that the core growth is trending much lower at 4% over the past six quarters.

The sustainability of even the core growth is suspect as the interim budget FY25 has scaled down the growth in infra sector allocation (roads, railways, and defence to 5.2%) and fragile support from the disproportionate contraction in imports relative to the decline in domestic demand.

Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.

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