In charts: GDP growth disappoints in April-June, but “not a cause for alarm”

As the statistical effect of low inflation and subsidy outgo normalised, India’s GDP growth declined to a five-quarter low of 6.65% in the quarter ended June. This was lower than the projected growth of 6.85% in a Mint poll. 

Disruptions in government activity due to India’s national election, which stretched from April to June, also played a role in slowing the country’s GDP growth.

However, growth in India’s gross value added (GVA), which economists say is a better indicator of underlying economic activity, rose to a three-quarter high of 6.84% in April-June, up from 6.27% in the preceding quarter, showing a divergence from GDP growth.

GDP differs from GVA by excluding the government’s subsidy outgo and including indirect tax collections. This means a lower subsidy outgo can lift the GDP relative to GVA. That was the case in 2023-24, when India’s GDP expansion benefited from a sharp decline of 14.6% in the subsidy bill, according to government finances data. However, in the June quarter, this dynamic reversed as subsidy expenses increased by 3.6% year-on-year, dampening GDP growth even as GVA remained strong.

“India’s GDP growth expectedly slowed down in Q1 even as the GVA growth surprisingly accelerated between these quarters,” said Aditi Nayar, chief economist at ICRA. “This divergent trend was led by the normalisation of the growth in net indirect taxes. The slowdown in GDP growth is not a cause for alarm in our view.”

Net indirect taxes refers to indirect tax collections minus subsidy outgo.

Sector-wise, most sectors saw an improvement in economic activity as compared with the previous quarter, with mining and construction leading the pack. However, manufacturing dragged the overall performance of the industrial sector. Services GVA, however, improved thanks to contributions from public administration, defence, and other services.

On the expenditure side, private final consumption expenditure, a proxy for private consumption, surprised with a seven-quarter high growth of 7.4% in the first quarter. Gross fixed capital formation, a proxy for investment, continued to record a decent rise. 

However, government final consumption expenditure proved to be a drag, declining 0.24% year-on-year amid disruptions caused by the general election.

Another factor that may have slowed the real GDP figure is the rise in wholesale price inflation, which was 2.43% in the April-June quarter, significantly higher than the January-March quarter’s 0.27%. 

Real GDP is adjusted for inflation from nominal GDP using both retail and wholesale inflation data, with more weight (65-70%) accorded to wholesale data.

Despite the decline in GDP expansion in the first quarter, economists are optimistic about another year of robust economic growth for India. “Looking ahead, we anticipate full-year GDP growth for the current financial year to align closely with our estimate of 7%,” said Sujan Hajra, chief economist at Anand Rathi Group.