Ira Singh
Khabar Khabaron Ki,06 June’24
India’s economic growth moderated in the fourth quarter of fiscal year 2023-24, with the real GDP expanding at a rate of 8.2%. While still robust, this figure represents a modest deceleration from the third quarter of FY24, which recorded a growth rate of 8.6%.A notable factor contributing to the moderation in overall GDP growth was the considerable slowdown in real gross value added (GVA) growth in the fourth quarter. GVA growth, a key indicator of economic performance, declined to 6.3% in 4QFY24, down from 8.3% in the first quarter of the fiscal year, according to estimates.
Despite the positive headline figures, concerns linger beneath the surface. The 7.8% growth in the fourth quarter reflects a modest deceleration from the preceding quarter, which recorded a growth rate of 8.6%. However, the average second-half growth of 8.2% remains unchanged over the first half, indicating stability in economic performance throughout the fiscal year.The apparent turnaround from the downturn witnessed in the second half of FY23, where the average growth stood at 7%, paints an optimistic picture. However, analysts have expressed concern over the inflated headline growth numbers.
Here are some key observations.
1 The moderation in real Gross Value Added (GVA) growth to 6.3% in the fourth quarter of FY24 reflects a broader trend of slowdown in the organized sector, highlighting challenges such as subdued demand and cost pressures. The sharp deceleration in operating profit growth among corporate entities underscores the need for measures to enhance productivity, streamline operations, and foster innovation within the organized sector.
2.According to estimates, India’s core GDP growth, excluding discrepancies, for the full fiscal year 2023-24 has averaged at 3.8%, marking a significant decline from the 7.1% recorded in the previous fiscal year of FY23 .Since the discrepancy element is highly correlated with the GDP deflator used to derive real GDP from nominal GDP, this inconsistency has created a statistical divergence between the GDP growth and the underlying demand situation. The substantial decline in core GDP growth from FY23 to FY24 underscores the need for a deeper analysis of economic indicators beyond headline figures. While GDP growth may appear robust on the surface, the divergence between growth rates and underlying demand suggests a more nuanced reality.
3.As India’s economic story evolves, recent data reveals a nuanced picture marked by shifting trends and divergent indicators. While the spread between real Gross Value Added (GVA) growth and core GDP growth has narrowed significantly from 7.8 percentage points in 1QFY24 to 1.2 percentage points in 4Q FY24, according to estimates, a new discrepancy emerges between elevated headline expenditure GDP growth and slowing real GVA.
The sharp increase in the incidence of net indirect tax, to 11.8% of nominal GDP and 20% of private final consumption expenditure (PFCE) in 4QFY24 is particularly driven by the Integrated Goods and Services Tax (IGST) component, averaged 19.4% in 4QFY24 and 8.6% annually, amounting to INR 15.4 trillion in FY24,according to estimates. Conversely, subsidy payments witnessed a significant contraction of 24% year-on-year in 4QFY24, primarily in food (-26%) and fertilizer (-31%) subsidies. Overall, the Government of India’s subsidy spending, totalling INR 4.1 trillion, is 22% lower than the previous year, reflecting efforts to rationalize expenditure and enhance fiscal sustainability.According to estimates, the output real GDP or GVA also saw deceleration in employment-intensive sectors. Primary sectors, agriculture, and mining collectively grew at 1.1% in 4Q (2.3% FY24 vs 4.4% in FY23). Secondary sectors (manufacturing, construction, and electricity) slowed to 8.8% from 10.7% in 3Q. And the services sector slowed to 6.1% from 7.1% in the 3Q.
From a policy standpoint, the current fiscal policies are exerting significant pressure on households,with peak tax burdens exacerbating financial constraints for individuals and families across the country. Though the recent revival in exports in 4Q FY24 after several quarters of slowdown presents a glimmer of hope amidst these challenges. However, risks to external trade loom large, particularly with the re-emergence of tensions in the US-China trade conflict.Sustaining the momentum in exports will be crucial for India’s economic resilience and global competitiveness.
Amid the government’s commitment to fiscal conservatism with an eye on sovereign rating upgrades, the fiscal multiplier (ratio of change in national income arising from a change in government spending) is expected to remain a drag on economic growth.
Moreover, economists observe that relying solely on GDP growth figures may lead to a distorted understanding of the economic landscape, potentially hindering effective policy formulation and decision-making. The evolving economic indicators in 4QFY24 highlight the need for continuous monitoring and adaptive policy responses to address emerging challenges and capitalize on opportunities for inclusive and resilient growth. By fostering a conducive environment for investment, innovation, and productivity enhancement, India can navigate the complexities of the economic landscape and advance towards its aspirations for prosperity and well-being for all citizens.