Under the Hood of the Fastest Growing Major Economy in the World

Under the Hood of the Fastest Growing Major Economy in the World

India’s economy roared in Q4 2023, defying expectations with an 8.4% surge in Gross Domestic Product (GDP), the key measure of overall economic output. But is it sustainable, and what caveats need to be considered? Read on as we unpack the details of the number making the headlines

 

To understand how well the economy is doing, experts often look at two key measures: Gross Value Added (GVA) and Gross Domestic Product (GDP). GVA tells us about the total value generated by making goods and providing services within the country, minus the costs of things like raw materials. It’s a way to see how productive and efficient different industries are and is often considered a better way of measuring economic activity.

On the other hand, GDP is the total value of all finished goods and services made in India within a year. It not only includes the value added by each industry (like GVA does) but also considers things like taxes on products and government subsidies. In simpler terms, GDP gives us a big picture of how much the whole country is producing and earning, including the money gained from taxes and the help from subsidies.

Both measures are important, as GVA helps us see how each sector, like agriculture or manufacturing, is doing individually. It’s like zooming in on specific parts of the economy. GDP, on the other hand, zooms out to show us the overall health of the country’s economy. It includes everything — what each sector adds to the economy plus the taxes and subsidies that affect the final value of goods and services. Both are crucial for understanding how well a country is doing economically.

Now, let’s talk about why India’s recent economic performance has been making headlines.

 

India’s Economy: Stronger Than Expected

The GDP numbers for the last quarter of 2023 (Q4) were quite a surprise. The economy grew by 8.4% compared to the same time the previous year, beating consensus economist expectations of 6.6% by a considerable margin. This growth trend wasn’t just a one-time thing; even the numbers for the two quarters before Q4 were revised upwards. The GDP for Q3 2023 was changed to 8.1% from an earlier 7.6%, and Q2 2023 saw growth of 8.2%, up from 7.8%. On top of that, changes in the data from the previous year (FY 22-23) made the economy look even stronger.

But let’s take a closer look at what made this growth happen. In Q4 2023, net taxes played a big role in boosting the GVA growth. GVA grew by 6.5%, which was expected, but the increase in net taxes added about 2.3 percentage points to this growth. This bump in net taxes was because the government reduced some subsidies, changing how much businesses pay in taxes. Looking at what’s driving the economy, we see:

 

  • Investments in things like infrastructure and machinery were a big part of why the economy grew. This kind of spending went up by 10.6% compared to the previous year, although it was a bit lower than in the previous quarter.
  • Government spending, while slower than before, still grew a lot compared to the same time the year before. This slight slowdown in government spending wasn’t a big deal, partly because last year’s numbers were very high, but it also suggests that businesses might start spending more of their own money soon.
  • On the other hand, regular people’s spending (like buying groceries or going out to eat) went up by 3.5% compared to the same time last year, which is a good sign.
  • However, the government’s own spending went down by 3.2% compared to the previous year, which was expected after a big increase in the previous quarter.
  • Also, the country’s exports didn’t help the GDP growth much, taking away about 1.2 percentage points from the overall growth. This was better than the previous quarter but still shows that selling things abroad is a bit tough right now.

 

When we look at how different parts of the economy are doing (sector-wise), we see:

  • The industrial sector, which includes things like manufacturing, is picking up. Even though manufacturing grew a bit slower than before, it was still up by 11.6% compared to the previous year.
  • Mining and utilities (like electricity and water) also grew, though not as fast as before.
  • On the flip side, agriculture, which employs over half of India‘s vast population, had a tough time, with output going down by 0.8% compared to the same time last year. This definitely does not bode well for the future, and may lead to exacerbating inequalities in the future.
  • The services sector, which includes things like banking and real estate, grew by 7.0% compared to the previous year, which is better than the 6.0% growth before. However, if we look at the numbers without adjusting for the usual seasonal changes, the services sector actually shrank by 5.9%. This was mostly because of fewer people using banking and real estate services during that time.

What Next for India’s Economy?

This unexpected growth has brought up interesting questions about what the government should do next. The Reserve Bank of India (RBI), which makes decisions about things like interest rates, might decide to hold off on cutting rates since the economy is doing better than expected. The Monetary Policy Committee (MPC), a group that helps the RBI make these decisions, seems to be leaning towards a wait-and-see approach. This means they might delay the rate cuts that many were expecting earlier.

In a nutshell, India’s economy in Q4 2023 showed us that it’s tough and can bounce back from challenges. The upward revisions in GDP forecasts, along with strong performances in sectors like manufacturing, give hope for continued growth. However, there are still some hurdles to overcome, especially in exports and parts of the services industry. As the economy keeps surprising us with its strength, policymakers will need to be careful with their decisions to make sure this growth keeps going. India’s economic journey in the next few months will depend on how well it handles these challenges while making the most of its strengths to keep growing.

Having said this, there are several caveats to unpack over the coming weeks under the hood of these numbers. Keep watching this space for more.

 

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