The trade, transport, communications, hotels,
etc, segment has slowed down to 6.3%, which is more due to the high-base syndrome (its growth was 14% last year). This is one segment that still sees vestiges of the pent-up demand, with people spending a lot of money in all these segments.
The first advance estimates of the gross domestic product (GDP) for FY24 needs to be interpreted with caution. With nine months in the year having passed and official data existing for the months up to November, taking a call on the full year is based on extrapolations. In fact, since the value added numbers for some sectors like manufacturing are based on the first two quarters information, there also is the assumption of persistence of trends, which may not always hold. Therefore the growth rate of 7.3% for the year should be seen more as a forecast rather than an estimate.
The question then would be: Is there any value in bringing out such information? In fact, towards the end of February, the second advance estimates will be brought out by the government. This would be more data-driven than extrapolation, and could be different from what has been projected this time.
There would be information for two more months, taking it closer to the mark. The answer is that such an estimate is required not from the academic standpoint but for drawing up the Union Budget. Ever since the Budget has been moved to February 1, having some estimate of GDP in absolute terms has become imperative for the finance ministry.
The Budget is based on an assumption of growth in the GDP as all tax revenues are juxtaposed against this number. While a projection for FY25 can be based on the ministry’s conjecture— which normally tends to be conservative, the base for FY24 needs to be there. This is where this advance estimate fits in. It also means that the Budget is based on two GDP numbers in nominal terms which are forecasts rather than true numbers. Hence, even though this number will change, there is some value to this number as there has to be an indicative number.
Prima facie, one could have expected a high GDP growth number, and, hence, 7.3% does not come as a surprise as it is higher than the RBI forecast of 7%. This had to happen as the first two quarters registered growth of 7.8% and 7.6%, and any extrapolation would mean replication of the same—which, in turn, provides an upward bias to the estimate. It is also not surprising that most of the growth rates look healthy as they gel with the official numbers released for various sectors till November, which is the latest data available on most indicators.
Manufacturing is to grow by 6.5%, and, here, the bulk is accounted for the organised sector where profit-and-loss (P&L) accounts of companies are used. For the unorganised sector, the Index of Industrial Production (IIP) is used, which has also been high due to the base effect.
Mining has grown by 8.1% and electricity by 8.3%. Here, too, the core sector data—released on a monthly basis—have highlighted the same level of buoyancy. In case of construction, where steel and cement are the main proxies that are used, 10.7% growth looks very much on expected lines. If the government is less aggressive on spending towards the end of the year, there could be some correction here. But, projects in housing and roads have dominated this sector’s growth.
The trade, transport, communications, hotels, etc, segment has slowed down to 6.3%, which is more due to the high-base syndrome (its growth was 14% last year). This is one segment that still sees vestiges of the pent-up demand, with people spending a lot of money in all these segments.
Ideally, a higher number would have been expected as the buoyancy remains even today if one goes by the proxies used. The finance and real estate segment has grown by 8.9%, which is in line with the high growth in deposits and credit in the banking system. The government sector has shown stability, at 7.7%, which in alignment with the accounts released till November.
The only disappointment—and this bears out in the real world—is agriculture, which is to slow down to 1.8%. In fact, this was to grow by 3-3.5%, but the kharif output has disappointed and it does look like that rabi harvest would also be lower this year as the sowing in wheat and chana are lagging. This can be attributed to the less-than-normal monsoon and the low reservoir levels seen at present.
The investment scene, as indicated by the gross fixed capital formation rate, needs to also be looked at with caution as it has increased from 29.2% to 29.8%.
But other proxies such as growth in bank credit to large industry or bond issues (which are basically by finance companies) do not support the theory that investment is booming. It can be assumed that this has come out of higher government capex, with the states not fully supporting this trend. It is possible that there could be some moderation going forward.
As the GDP data is based on extrapolations, an interesting feature which emerges is that consumption in nominal terms has grown by 8.7%, which is less than the GST collections rate for first nine months that was in double digits (11.7%). This can see some upward movement when the final numbers are out as the two should move together once the economies of better compliance are exhausted.
On the whole, it does look like that there could be downward bias to the estimate and growth will tilt towards the 7% number. There is likely to be a slowdown in corporate profits growth and affect segments where these proxies are used. But this will be a good base for the government to use when planning the Budget and estimating the revenues to be garnered.