India's GDP Growth: Decoding the Past, Uncertain About the Future

View: Latest GDP numbers do a better job of deciphering the past than of predicting the future - The Economic Times

In today's age of data analytics, predictive tech and AI, data points are valuable not so much for what they tell us about the past but for how well they can predict the future. By that yardstick, Q1 GDP numbers released by NSO last Friday for the quarter ended June 2024 are likely to fail the test. In a world dogged by uncertainty, where black swan events are seemingly no longer the exception, macroeconomic numbers like GDP are incredibly hard to predict. The past is no guide to the future. No one foresaw the pandemic or, further back in time, the Global Financial Crisis, both of which saw GDP growth collapse dramatically. Sure, these were catastrophic events. But, thanks to geopolitics, there are just too many unknown unknowns in the world today to expect GDP estimates for a single quarter to give us more than a very rough idea of how growth is likely to pan out in future. However, future performance is never completely divorced from the past. And while it is true that one 'can't drive a car looking in the rearview mirror', as comedian Steve Harvey once put it, the latest numbers contribute in two invaluable ways. Of course, any prediction is fraught with risk and could eventually be wide off the mark. As Yogi Berra, the baseball hero of yesteryears, famously remarked, 'The future ain't what it used to be!' With that caveat in mind, let's turn to the numbers, bearing in mind three distinct features of Q1 that are bound to have impacted economic performance in the quarter. Despite all this, the good news is that the economy is on a strong wicket. Though Q1 growth has been the lowest in the last five quarters, the wide dissonance between GVA and GDP has finally corrected. Indeed, GVA, which is GDP less indirect taxes plus subsidies, and is usually seen as a better indicator of economic activity, is not only higher (6.8%) than Q1 GDP, it's higher than in the previous quarter (6.3%) as well. Even better, the sectoral divergence in performance (with growth in agriculture lagging far behind that in other sectors) is finally narrowing. Against a dismal growth of 0.6% in the previous quarter (Q4 FY24), agriculture growth in Q1 FY25 has improved to 2%. Since this comes on a fairly high base of 3.7% in the comparable quarter of the previous year, this is good news. Given that close to 50% of our population is still dependent on the farm sector and poor rural demand has been an important contributor to the slow growth in consumption demand in the economy, it bodes well for overall growth. Meanwhile, sustained strong growth in manufacturing (7.2%) and labour-intensive sectors like construction (10.5%) is encouraging. Most heartening is the improvement in gross fixed capital formation to 34.8% of GDP, the highest in the last 13 quarters. Given that gov spending is likely to have been subdued in Q1 due to the elections, it is safe to surmise that some of this increase is due to a long-overdue revival in animal spirits in the private sector. Overall, it is safe to expect that growth this year will be close to 7%, even if it does not touch 7.2%, as estimated by RBI. The problem is, higher growth offers scant comfort when the global economy is slowing. Though latest numbers from the US, the biggest growth driver, globally, show US growth is still strong, there are fears this may not be sustained. Meanwhile, growth in China is slowing, even as geopolitical tensions are rising, and the prospect of Donald Trump's return as US president casts a pall of gloom. 'From a macroeconomic perspective, the Indian economy is in a sweet spot, with the mix of solid growth and moderating inflation,' said Moody's Ratings in the August update of its Global Macro Outlook 2024-25. It is for us to deliver on that.

View: Latest GDP numbers do a better job of deciphering the past than of predicting the future

In today's age of data analytics, predictive tech and AI, data points are valuable not so much for what they tell us about the past but for how well they can predict the future. By that yardstick, Q1 GDP numbers released by NSO last Friday for the quarter ended June 2024 are likely to fail the test. In a world dogged by uncertainty, where black swan events are seemingly no longer the exception, macroeconomic numbers like GDP are incredibly hard to predict. The past is no guide to the future. No one foresaw the pandemic or, further back in time, the Global Financial Crisis, both of which saw GDP growth collapse dramatically. Sure, these were catastrophic events. But, thanks to geopolitics, there are just too many unknown unknowns in the world today to expect GDP estimates for a single quarter to give us more than a very rough idea of how growth is likely to pan out in future. However, future performance is never completely divorced from the past. And while it is true that one 'can't drive a car looking in the rearview mirror', as comedian Steve Harvey once put it, the latest numbers contribute in two invaluable ways. Of course, any prediction is fraught with risk and could eventually be wide off the mark. As Yogi Berra, the baseball hero of yesteryears, famously remarked, 'The future ain't what it used to be!' With that caveat in mind, let's turn to the numbers, bearing in mind three distinct features of Q1 that are bound to have impacted economic performance in the quarter. Despite all this, the good news is that the economy is on a strong wicket. Though Q1 growth has been the lowest in the last five quarters, the wide dissonance between GVA and GDP has finally corrected. Indeed, GVA, which is GDP less indirect taxes plus subsidies, and is usually seen as a better indicator of economic activity, is not only higher (6.8%) than Q1 GDP, it's higher than in the previous quarter (6.3%) as well. Even better, the sectoral divergence in performance (with growth in agriculture lagging far behind that in other sectors) is finally narrowing. Against a dismal growth of 0.6% in the previous quarter (Q4 FY24), agriculture growth in Q1 FY25 has improved to 2%. Since this comes on a fairly high base of 3.7% in the comparable quarter of the previous year, this is good news. Given that close to 50% of our population is still dependent on the farm sector and poor rural demand has been an important contributor to the slow growth in consumption demand in the economy, it bodes well for overall growth. Meanwhile, sustained strong growth in manufacturing (7.2%) and labour-intensive sectors like construction (10.5%) is encouraging. Most heartening is the improvement in gross fixed capital formation to 34.8% of GDP, the highest in the last 13 quarters. Given that gov spending is likely to have been subdued in Q1 due to the elections, it is safe to surmise that some of this increase is due to a long-overdue revival in animal spirits in the private sector. Overall, it is safe to expect that growth this year will be close to 7%, even if it does not touch 7.2%, as estimated by RBI. The problem is, higher growth offers scant comfort when the global economy is slowing. Though latest numbers from the US, the biggest growth driver, globally, show US growth is still strong, there are fears this may not be sustained. Meanwhile, growth in China is slowing, even as geopolitical tensions are rising, and the prospect of Donald Trump's return as US president casts a pall of gloom. 'From a macroeconomic perspective, the Indian economy is in a sweet spot, with the mix of solid growth and moderating inflation,' said Moody's Ratings in the August update of its Global Macro Outlook 2024-25. It is for us to deliver on that.