This appears a legitimate question given the conflicting signals emanating from the GDP report and the residual methodological issues. If one took headline GDP growth at face value, one would have to conclude that April-June GDP growth was a disappointment. GDP growth (at market prices) slowed to seven per cent in April-June from 7.5 per cent the quarter below and was meaningfully below market expectations.
However, drawing too many conclusions from the headline print is dangerous, because the translation from gross value added on the supply side (GVA at basic prices) to GDP (at market prices) has been very puzzling the last two quarters. Last quarter, GVA growth slowed to 6.1 per cent but GDP growth surged to 7.5 per cent, buoyed by strong net indirect tax collections (indirect taxes less subsidies). In effect, therefore, net indirect taxes added 1.4 percentage points to GDP growth. The quantum was questionable even though the ordering of GDP and GVA was understandable given tax and subsidy dynamics.
This quarter exactly the opposite happened, with GDP printing below GVA! This is particularly mystifying because, by all accounts, indirect tax growth has been solid (even adjusting for the change in tax rates) and subsidies have collapsed on the back of lower oil prices in 1QFY16. Despite this, however, even as GVA growth accelerated from 6.1 per cent to 7.1 per cent, net indirect tax collections subtracted 0.1 percentage points from GVA, such that GDP slowed from 7.5 per cent to 7 per cent. The mystery deepens when you consider that the deflator for indirect tax collections was 2.6 per cent in the January-March quarter and 31.4 per cent in the April-June quarter!
Given these issues, we believe the dynamics of gross value added (GVA) are a better representation of economic activity on the ground. And GVA accelerated smartly from 6.1 per cent in 4Q15 to 7.1 per cent in 1Q16. To be sure, much of the acceleration was driven by stronger agriculture and public administration growth in April-June. Net of those sectors, "private industry and services" growth slowed a tad to 8.8 per cent from 9.1 per cent last quarter - but this is still much stronger than the 7.1 per cent growth from two quarters ago. In effect, if one smoothens the noise from quarterly data, private industry and services growth has been steadily rising over the last few quarters, which is consistent with the high frequency data available (auto sales, consumer durables, corporate profits).
But the question is can this growth sustain? In a world where China is slowing and there are downside risks to global growth, can Indian growth continue to accelerate? It is not inconceivable. Growth is bound to suffer from a big exports drag. But remember, India is benefiting from a huge terms of trade shock on the back of oil and commodity prices that are the lowest in five years. This is pushing down inflation, boosting purchasing power and bolstering firm margins. So think of current global dynamics as inducing a rebalancing of India's growth: exports will be under pressure but domestic demand is likely to benefit from a huge terms of trade shock. That said, this is growth that is being helped substantially by global benevolence. Policy makers have to keep chipping away at structural reform so that when the commodity cycle turns, our growth and inflation gains don't suddenly evaporate.
The writer is Chief India Economist, JP Morgan
However, drawing too many conclusions from the headline print is dangerous, because the translation from gross value added on the supply side (GVA at basic prices) to GDP (at market prices) has been very puzzling the last two quarters. Last quarter, GVA growth slowed to 6.1 per cent but GDP growth surged to 7.5 per cent, buoyed by strong net indirect tax collections (indirect taxes less subsidies). In effect, therefore, net indirect taxes added 1.4 percentage points to GDP growth. The quantum was questionable even though the ordering of GDP and GVA was understandable given tax and subsidy dynamics.
This quarter exactly the opposite happened, with GDP printing below GVA! This is particularly mystifying because, by all accounts, indirect tax growth has been solid (even adjusting for the change in tax rates) and subsidies have collapsed on the back of lower oil prices in 1QFY16. Despite this, however, even as GVA growth accelerated from 6.1 per cent to 7.1 per cent, net indirect tax collections subtracted 0.1 percentage points from GVA, such that GDP slowed from 7.5 per cent to 7 per cent. The mystery deepens when you consider that the deflator for indirect tax collections was 2.6 per cent in the January-March quarter and 31.4 per cent in the April-June quarter!
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But the question is can this growth sustain? In a world where China is slowing and there are downside risks to global growth, can Indian growth continue to accelerate? It is not inconceivable. Growth is bound to suffer from a big exports drag. But remember, India is benefiting from a huge terms of trade shock on the back of oil and commodity prices that are the lowest in five years. This is pushing down inflation, boosting purchasing power and bolstering firm margins. So think of current global dynamics as inducing a rebalancing of India's growth: exports will be under pressure but domestic demand is likely to benefit from a huge terms of trade shock. That said, this is growth that is being helped substantially by global benevolence. Policy makers have to keep chipping away at structural reform so that when the commodity cycle turns, our growth and inflation gains don't suddenly evaporate.
The writer is Chief India Economist, JP Morgan