Number Theory: Four charts which explain latest GDP numbers

A look at the key takeaways from the GDP numbers released on Thursday.

India’s GDP grew at 7.8% in the quarter ending June 2023 according to data released by the National Statistical Office (NSO). Beyond the headline number – it was exactly what was projected by a Bloomberg poll of economists – what does the latest data tell us about the state of the economy? Here are three key takeaways.

India’s GDP grew at 7.8% in the quarter ending June 2023

The charts that matter

• 
  Consumption is gaining gradual momentum but government capex continues to play an important role in driving growth

  An expenditure-wise analysis of the GDP numbers shows a 34.7% share for gross fixed capital formation (GFCF) – it measures investment spending in the economy – in overall GDP. While this is a marginal decline compared to the 35.3% share in the quarter ending March 2023, GFCF’s share is among the highest by historical standards. This underlines the fact that government capex – the private investment cycle is showing promise but still to show a sustained uptick – has played an important role in driving growth. This is also evident from disaggregated growth numbers. Annual growth in private and government consumption (the sum of Private Final Consumption Expenditure and Government Final Consumption Expenditure) was 4.9% in the June quarter while GFCF grew at 8%. This is the fifth consecutive quarter when GFCF growth has been greater than combined growth in PFCE and GFCE.
• 
  At a sector-wise level, services continue to drive growth

  A sector-wise analysis of the Gross Value Added (GVA) numbers shows that services continue to be the best performer on the growth front. The headline growth in services GVA is an impressive 10.3% compared to 3.5% and 5.5% for agriculture and industry. In terms of contribution to the overall increase in GVA, between the June 2022 and June 2023 quarters, the contribution of services is a massive 72%. While a fraction of the service sector growth could be the result of a statistical boost due to price adjustment related issues (for details see https://tinyurl.com/b5uzymc2) there is both empirical (services PMI) and anecdotal (growing demand for contact intensive services) evidence to suggest that services have seen a strong revival. The only area of concern emerges when one compares the sector-wise growth numbers with employment shares, which show that some sectors with high GVA but low employment share have made the biggest contribution to the growth momentum. When read with the fact that consumer confidence, as measured by the RBI’s Consumer Confidence Survey continues to remain negative – to be sure, it is on a rising trajectory – this suggests that fruits of even an impressive growth momentum continue to elude a significant section of workers.
• 
  Nominal growth component in the June quarter is among the lowest ever

  With a nominal GDP growth of 8% and real growth of 7.8%, the nominal growth component of 0.2 percentage points in the June quarter is the second lowest in the current series in absolute terms. This is likely a result of a contraction in wholesale prices in the June quarter. A historical comparison of nominal growth component and wholesale inflation shows that the two closely follow each other. A low nominal growth number can be worrying for the government as nominal GDP forms the base for revenue collection. The 2023-24 Budget assumed a nominal growth of 10.5% for the fiscal year, which, when compared with RBI’s projection of a 6.5% real growth, gives a nominal growth component of 4 percentage points. While wholesale inflation is expected to increase with the waning of base effects going forward, the collapse in nominal growth in the June quarter is a bitter-sweet development for the government. Lower commodity prices are a big help in keeping core inflation in control at a time when food prices are becoming a problem, but they could generate headwinds for revenue collection, limiting the government’s ability to spend closer to the elections without breaching the already high fiscal deficit levels.