Q3 GDP growth surprises at 8.4%, full year pegged at 7.6%

1 Mar 2024 , 09:12 AM

WHEN MACROS BEAT EXPECTATIONS BY A MARGIN

In fact, that could very well be the theme of the latest GDP numbers. On the last working day of February 2024, the MOSPI published the GDP reading for the third quarter ended December 2023. In addition, the second advance estimate of the full year GDP for FY24 was also presented, updated for the Q3 numbers. To say the least, the numbers were beyond what even the optimists would have imagined about growth. There is absolutely no exaggeration, when we say that even the optimists would have been surprised. 

Let us look at the full year GDP numbers first. Just ahead of the announcement of Q3 numbers, the consensus GDP growth estimate stood in the median range of 6.6% to 6.9%. The most optimistic estimate had pegged the GDP growth rate for Q3-FY24 at 7.2%. Nobody really expected anything beyond that. However, the actual GDP growth number for Q3-FY24 came in at a whopping 8.4%. In addition, the full year estimate for GDP growth for FY24, as per the second advance estimates stand at 7.6%. This is not only 30 bps higher than the first advance estimate at 7.3%, but a full 60 bps higher than the RBI estimate of 7.0% for full year GDP growth for FY24.

HOW THE GDP GROWTH EVOLVED IN Q3-FY24

The table captures the item-wise segregation. To get a more realistic picture, we have considered the GVA growth. GVA is GDP shorn of the impact of taxes and subsidies, so it gives a more realistic picture.

Real Sectoral Growth (%)	Q1 FY23	Q2 FY23	Q3 FY23	Q1 FY24	Q2 FY24	Q3 FY24
Agriculture	2.66	2.27	5.19	3.53	1.62	-0.82
Mining	6.56	-4.13	1.37	7.12	11.12	7.55
Manufacturing	2.18	-7.19	-4.78	5.02	14.37	11.55
Utilities	15.55	6.41	8.65	3.17	10.53	8.97
Construction	14.69	6.85	9.47	8.55	13.52	9.45
Trade/Hotels	22.09	13.20	9.17	9.67	4.51	6.69
Financial Services	10.49	8.71	7.69	12.59	6.22	6.99
Defence and admin	23.59	7.30	3.52	8.22	7.72	7.48
Real GVA	11.34	5.04	4.83	8.23	7.67	6.50
Net Taxes	37.60	10.66	-2.56	8.03	12.77	31.98
Real GDP	12.81	5.46	4.26	8.22	8.08	8.36

Data  Source: MOSPI

Before we go ahead, it must be noted that all of the above are real growth data, which is net of the inflation effect, and we shall look at the nominal data also at a later stage. Here are some of the key takeaways from the GVA / GDP data above.

• For Q3-FY24, the GVA growth has been pegged at 6.50%. One might wonder how the GVA is so vastly different from the Real GDP growth at 8.36%. The reason is the sharp spike in the net tax revenues in the latest quarter, as is evident in the table above.

   

• What is interesting in the above table is that the GDP growth assumption for Q1 and Q2 has been revised higher to above 8%, so all the 3 quarters in this fiscal year FY24 have grown at above 8%.

   

• Now, if the first 3 quarters are at over 8% and the full year is pegged at 7.6%, then it only implies that the fourth quarter GDP is being pegged at around 5.9%. That does look tad unrealistic looking at the momentum. In all possibilities, Q4 GDP may also be raised.

   

• Let us come to the specific items. Obviously, farm output has been under pressure and has consistently been trending lower. Over the last 4 quarters, it has fallen from 5.19% to -0.82% as the stress of the El Nino effect has been showing on farm output.

   

• Manufacturing has done a real turnaround, with the GVA bouncing from -4.78% to 11.55% in the last one year. That turnaround has largely been on the back of better capacity utilization in industry and higher infrastructure investments.

   

• Among the high contact intensive sectors, it is construction that has maintained the steady growth. However, trade, hotels and financial services have seen the growth fall steadily over the last one year as the early gains of opening up are gradually waning.

In a nutshell, the growth numbers have flattered, despite a rather disappointing show by agriculture output. The GDP numbers have surely flattered much beyond all expectations.

HOW THE NOMINAL GDP ESTIMATES LOOK FOR Q3-FY24

The nominal GDP is the value of the GDP before you consider the impact of inflation. Remember, while it is real GDP that we normally talk about, it is the nominal GDP that is relevant for the purpose of taxation estimates and for job creation. Again, we look at GVA here, which is a lot more reliable as it is shorn of taxes and subsidies.

Nominal Sectoral Growth (%)	Q1 FY23	Q2 FY23	Q3 FY23	Q1 FY24	Q2 FY24	Q3 FY24
Agriculture	13.19	10.19	6.70	4.24	7.93	3.84
Mining	40.60	15.16	7.46	1.51	12.24	6.43
Manufacturing	13.93	0.62	-0.17	2.17	12.00	10.59
Utilities	10.03	6.78	4.12	13.55	9.40	4.08
Construction	33.81	18.43	15.47	6.26	12.91	10.41
Trade/Hotels	38.97	25.24	15.08	7.22	4.44	7.45
Financial Services	24.07	19.93	15.45	12.70	7.85	9.24
Defence and admin	30.35	14.00	9.31	13.82	14.07	13.13
Real GVA	24.16	14.75	9.82	8.20	9.26	8.34
Net Taxes	41.03	17.07	5.06	11.11	13.32	29.11
Real GDP	25.52	14.95	9.41	8.46	9.62	10.07

Data  Source: MOSPI

As we stated earlier, the nominal GDP and GVA numbers are relevant as they hint at the impact of GDP gross of taxes. This is more relevant from a tax revenues standpoint and also from the perspective of jobs generation. Here is a quick comparison of the nominal and real GVA and GDP numbers.

• Let us talk about GDP first. The Nominal GDP growth for Q3-FY24 was at 10.07%, showing consistent growth in the last 3 quarters. If on compares the nominal GDP growth and the real GDP growth of the last 2 years, it is even intuitively clearly that the impact of inflation on GDP is much lower this year than in the last year. That is also borne out by the inflation data coming in.

   

• In terms of agricultural GVA growth, it was at 3.84%, but due to the high levels of rural inflation, the real GVA growth has dipped into the negative zone. Of course, the nominal growth in farm output is also sharply lower than the average of the last 6 quarters, and that can be largely attributed to the El Nino effect on the farm output.

   

• In the case of manufacturing the real GVA growth is higher than the nominal GVA growth. That sounds like an anomaly, but there is a logic to it. It shows that manufacturing inflation has been negative, which is also evidenced by the constantly contracting price of inputs, which has kept corporate margins robust. 

   

• The impact of net taxes has been quite high this year and that is evident in the sharp spike in taxes amidst robust collections by the government. That also explains the fairly large gap between the GDP and the GVA in the current year, which is much higher than what it was in the previous years.

The quick takeaway from the above table is that Indian economy is growing at a much better pace in nominal terms and in real terms too. That is also a message that the growth could be sustainable into Q4 and into FY25 too.

REAL AND NOMINAL GROWTH ESTIMATES FOR FY24 (SECOND ESTIMATE)

Having looked at the real and nominal performance of GVA growth for the third quarter and a comparison of the previous quarters, let us now turn to the second estimate of full fiscal year FY24. The table below captures real GVA growth for FY24, compared to FY23.

Sector	GVA FY22 (₹ in Crore)	GVA FY23 (₹ in Crore)	GVA FY24 (₹ in Crore)	FY23  Growth (%)	FY24  Growth (%)
Agriculture	21,70,106	22,72,250	22,87,329	4.71	0.66
Mining	3,09,276	3,15,256	3,40,821	1.93	8.11
Manufacturing	25,61,033	25,04,663	27,17,235	-2.20	8.49
Utilities	3,17,966	3,47,973	3,74,125	9.44	7.52
Construction	11,93,532	13,06,256	14,45,603	9.44	10.67
Trade/Hotels	24,80,380	27,77,723	29,57,058	11.99	6.46
Financial Services	31,22,847	34,05,474	36,84,959	9.05	8.21
Defence and admin	17,21,699	18,75,304	20,20,579	8.92	7.75
GVA at Basic Prices	1,38,76,840	1,48,04,901	1,58,27,708	6.69	6.91

Data  Source: MOSPI

The real GVA growth for FY24 is almost at par with FY23, which shows that, shorn of taxes and subsidies, there has not been much of difference between FY23 and FY24. Again, the latter is an estimate and the hunch is that the final number could be a lot better. If you compare the estimates of FY24 with the actuals for FY23, then clearly it is agriculture that is sharply down. Trade / hotels and financial services have also tapered due to the early enthusiasm of contact intensive services waning. However, the real thrust came from mining and manufacturing. While real mining growth has jumped from 1.93% to 8.11%, the real manufacturing growth has turned around from -2.20% to 8.49% in FY24. These are some of the dichotomies between FY23 and FY24 in real GVA growth terms. Let us now turn to the nominal growth in GVA for FY24 versus FY23.

Sector	GVA FY22 (₹ in Crore)	GVA FY23 (₹ in Crore)	GVA FY24 (₹ in Crore)	FY23  Growth (%)	FY24  Growth (%)
Agriculture	40,99,473	44,84,268	46,92,360	9.39	4.64
Mining	4,39,339	4,94,602	5,27,064	12.58	6.56
Manufacturing	33,92,605	35,36,461	37,73,280	4.24	6.70
Utilities	5,77,793	6,04,209	6,51,838	4.57	7.88
Construction	18,35,674	21,78,693	23,97,798	18.69	10.06
Trade/Hotels	36,74,918	44,10,148	46,88,447	20.01	6.31
Financial Services	46,45,873	55,20,163	60,52,948	18.82	9.65
Defence and admin	29,69,909	34,30,497	38,93,944	15.51	13.51
GVA at Basic Prices	2,16,35,584	2,46,59,041	2,66,77,679	13.97	8.19

Data  Source: MOSPI

That is where the dichotomy is more pronounced. While real GVA growth for FY23 and FY24 have been at par, the nominal growth for FY24 at 8.19% is sharply lower than the nominal growth of 13.97% in FY23. The difference is that inflation has been controlled a lot better in FY24 as a direct outcome of the hawkish policies adopted by the RBI.

DOING SOME SMART READING THROUGH THE MAZE OF NUMBERS

The GDP and GVA for Q3-FY24 and for the estimated full year FY24 are obviously a massive maze of numbers. Here are some smart takeaways from the numbers.

1. The robust above-8% growth in Q1, Q2, and Q3 and full year growth estimates of 7.6%, pre-suppose Q4 GDP growth at 5.9%. That is not only conservative, but also looks unrealistic going by the current momentum. The Red Sea crisis has had limited impact on the Indian economy, so side effects should be limited. It is likely that Q4 may be closer to 7% in real terms, which means the full year GDP growth would be closer to 8%, which is at par with the last 3 quarters.

    

2. The good news is that, for the first time since the post-pandemic period, individual households and corporates are saving and also investing aggressively. Two data points evidence this argument. For instance, the gross savings rate is slated to grow from 30.2% in FY23 to 32.3% in FY24. There has been an accretion in household investments in financial assets as well as physical assets. At the same time, the Gross Capital Formation is estimated to have grown to 33.7%. While the savings rate is the best since FY14, the GCF is the best since FY19. 

    

3. There has been  sharp improvement in the Incremental Capital Output Ratio (ICOR), which measures the efficiency of capital usage. The lower the ICOR, the better it is. ICOR used to be at a high of 7.5X in FY12 and has now comedown to 4.4X. That means; for the same level of output, the usage of capital inputs is a lot lower, hinting at substantially higher efficiency and could be attributed to the sharp surge in the capacity utilization levels.

    

4. There is a marginal lowering of the FY23 GDP, which has also improved the FY24 GDP estimates. This is also good news for the fiscal deficit. Remember, fiscal deficit is measured with reference to the GDP of the same year. With the GDP for FY23 lowered, the 5.8% fiscal deficit should be automatically achieved now.

Overall, the GDP growth for Q3 and for FY24 appears to have flattered on the upside. It has not only left the sceptics licking their wounds, but has even astonished the die-hard optimists.