India’s Q3 FY24 GDP growth printed at 8.4% YoY, around 180 bps higher than the market consensus of 6.6%. However, the upside surprise in Q4 FY24 GVA growth figure is relatively sedate (6.5% vs. market expectation of 6.4%). 

Let’s look at the reasons for the big surprise in growth data. The NSO revised the GDP figures for FY22 and FY23 basis detailed granular information. On cumulative basis, FY22 GDP and FY23 GDP growth saw an upward and downward revision of 60 bps and 20 bps respectively. As such, the quarterly estimates of FY22 and FY23 along with the first and second quarter estimates of FY24 released earlier underwent a revision. With support from favorable statistical base, it has resulted in FY24 GDP growth estimate getting revised up by 30 bps to 7.6%.

However, it’s not just this statistical calibration that’s behind the positive surprise. The higher than anticipated net indirect taxes in the current financial year has amplified the GDP growth momentum. The difference between GDP and GVA growth stood at a record high of 190 basis points in Q3 FY24 vis-à-vis the average median spread of 20 basis points seen in the current data series.

Given the unusually wide divergence between GVA and GDP data, there is therefore a dilemma as to which metric is better to understand the underlying growth scenario. We believe the supply side activity captured by the GVA data is a better representative of the underlying growth momentum at this point. Having said so, key individual items with the demand/ expenditure side of GDP also provides a good assessment.

Key highlights of Q3 data

• From GVA perspective, the growth momentum is showing moderation – Q3 print of 6.5% is the lowest amongst the first three quarters in FY24. Further, it’s not completely broad based.
  1. Agriculture and allied sectors saw their first annualized contraction in 19-quarters, reflecting the impact of adverse weather conditions on account of El Nino.
  2. While growth in the industrial sector moderated, the annualized print remained in double digit for second quarter in a row.
  3. In contrast, growth in services sector increased with support from Trade, Transport and Communication activities along with Finance, Business, and Real Estate services.
• Glancing through the components of GDP, we note that the Q3 print of 8.4% is the highest amongst the first three quarters in FY24. However, the internals do not provide the same degree of optimism:
  1. Government consumption posted a contraction as the combined revex (excluding interest payments) by central and state governments contracted by 4.5% YoY in Q3 FY24 vis-à-vis an expansion of 15.0% in Q3 FY24.
  2. Growth in investments and exports moderated, although the double-digit growth in investments for two consecutive quarters provides support.
  3. While private consumption growth improved from 2.4% YoY in Q2 FY24 to 3.5% in Q3, the underlying recovery remains subdued.
  4. Primarily, the improvement in headline GDP springs from high growth in net indirect taxes and spending on valuables. 

Outlook

Basis the revision in FY24 GVA/GDP data and the available information for the first three quarters, the implied annualized growth for Q4 GVA and GDP is estimated at 5.4% and 5.9% respectively by NSO. While this denotes a sharp deceleration in growth momentum, we would caution against extrapolating the pace of deceleration as the same would suffer from adverse statistical base effect and year end volatility in indirect taxes and subsidies (the latter applicable for GDP data).

It would be instructive to go through the annual data for capturing the underlying trend on a meaningful basis. Here, we note that GVA growth after posting its post pandemic peak of 9.4% in FY22, moderated to 6.7% in FY23. While the NSO estimates it to post a mild improvement to 6.9% in FY24, bulk of this is on account of higher value-add from reduction in input prices (we estimate WPI inflation to clock an average of -0.7% in FY24 vs. +9.6% in FY23). 

Going forward, WPI inflation is likely to turn positive (RBI’s survey of professional forecasters point towards a median estimate of 3.7% in FY25), thereby lowering corporate profitability from their FY24 highs. In addition, a mild tightening impact of both monetary and fiscal policies would play out in FY25. From an external perspective, the ongoing geopolitical disruptions, and concerns of slowdown in Europe and China would need to be monitored.

• For FY24, we align our forecast for GDP and GVA growth to NSO’s revised estimate of 6.9% and 7.6%.
• For FY25, we expect GVA and GDP growth to moderate to 6.4% and 6.7% respectively.

Says Suman Chowdhury, Chief Economist and Head-Research, Acuité Ratings & Research “The second advance estimates of GDP for FY24 released by NSO has indeed sprung a major surprise on the markets. The GDP growth for Q3FY24 is pegged sharply higher at 8.4% as compared to the consensus estimate of 6.6%. Further, the GDP estimates for the current year has been revised to 7.6% which is also significantly higher than our forecasts of 6.8%. One of the key reasons for the material shift in the GDP print is the revisions in the GDP/GVA data for some quarters of the previous fiscal. 

 What is noteworthy is the significant differential between GVA (6.5%) and GDP (8.4%) growth not only in the third quarter but in the whole fiscal. This is largely due to the very high growth in net indirect taxes during the year. As regards the different economic segments, the manufacturing sector has grown by 11.6% YoY in Q3FY24 which is driven by higher operating margins driven by lower raw material costs. Expectedly, the services sector has seen a significant uptick, but at the same time, the agricultural sector has seen a modest contraction of 0.8% during the quarter. Importantly, the private consumption growth has been sluggish at 3.5% and in the context of high GDP growth, remains an area of concern. 

Given the revised GDP data, we have made significant changes in our FY24 and FY25 forecasts. Clearly, the higher-than-expected momentum in the economy may lead to a tight monetary policy from RBI for a longer period and any reversal in the current stance is unlikely over the next 6 months." 

Table 1: India’s GVA and GDP: Sectoral break-up of annualized growth

Table 2: GVA and GDP growth estimates for FY22-FY24 undergone sizeable revisions