ExplainSpeaking | The fly in the (GDP data) ointment: Faltering consumption growth

Last week, the government released the so-called Provisional Estimates (PE) of India’s national income for the financial year 2022-23 (or FY23). According to the PEs, the size of India’s economy — calculated by the Gross Domestic Product (GDP) or the market value of all final goods and services produced within the country — grew by 7.2 per cent in FY23. This means, India’s GDP was 7.2% more than what it was in the previous financial year (2021-22).

The Indian financial year starts in April and ends in March, hence the complicated nomenclature.

About GDP estimates

Before we get into the salience of the GDP data, here’s a quick understanding about the various growth “estimates” that the government provides.

For any financial year, say 2019-20, the GDP estimates go through several rounds of revisions. Each year in January, the Ministry of Statistics and Programme Implementation (MoSPI) releases the First Advance Estimates (FAEs) for that financial year. In February end, after incorporating the data from Q3 (third quarter, which includes October, November and December), come the Second Advance Estimates (SAEs).

By May-end come the Provisional Estimates (PEs) after incorporating the Q4 (Jan to March) data. Then with each passing year, the PEs are revised to give the First Revised Estimates, the Second Revised Estimates and the Third Revised Estimates before settling on the “Actuals”. Each revision benefits from more data, making the GDP estimates more accurate and robust.

What did the latest estimates show?

At 7.2% growth, the GDP data surpassed everyone since most estimates, including RBI’s, were closer to 7%. The main reason for this overall surprise was the GDP growth in the fourth quarter. As against the broad expectations of anywhere between 4% to 5% growth, the GDP grew by 6.1%. This pulled up the whole year’s growth to 7.2%. This salutary performance has made everyone in the economy quickly revise upwards the GDP forecast for the current financial year (FY24).

Fly in the ointment

However, there is a fly in the (GDP data) ointment. It is called the Private Final Consumption Expenditure (PFCE).

Typically, GDP is calculated by adding up all expenditures in the economy. These expenditures are broadly categorised in four groups:

1. All the money Indians spend in their personal capacity — from buying an ice cream to watching a movie to buying a TV or car. This is called the PFCE. Such expenditures account for 55%-60% of India’s annual GDP.

2. All the money the governments spend on their daily uses — paying salaries etc. This is called Government Final Consumption Expenditure (GFCE) and this accounts for 10% of India’s GDP.

3. All the money spent by private companies and governments towards building productive capacities in the economy. Say a firm buying desktops for its employees or the government spending money on building a road. This is called the Gross Fixed Capital Formation (GFCF) and this accounts for 30%-32% of the GDP.

4. Net exports or the net of all the money that Indians received by exporting goods and services and minus all the money they spent on importing goods and services. More often than not, India’s imports are more than its exports. As such the Net Exports component is negative and drags down overall GDP.

As is evident, the PFCE is the biggest engine of growth. Typically, if it is growing robustly then one would presume that the second biggest engine of GDP growth — expenditures towards investments — will follow suit. For a big economy such as India, together, these two components can create a virtuous cycle.

The most inconvenient part of the GDP data is the weakness in the growth rate of PFCE. Data shows that for the full year (FY23), PFCE grew by 7.5%. But in the last two quarters, it grew by 2.1% and 2.8% respectively. These are growth rates that are not only much slower than the annual average but also slower than the GDP growth rate for the third and the fourth quarter (see TABLE 1).

Growth in PFCE vis-a-vis GDP growth.

The obvious question is: While it is all very fine for the moment to be happy about India’s GDP growth rate, what about sustaining it? How can India achieve a fast growth rate (8% or above), or even sustain a moderate one (around 6%) without PFCE — the biggest driver of GDP — growing adequately fast?

The resolution

There are only two ways in which this odd trend will resolve.

If indeed the PFCE growth rate is faltering — that means common Indians keep holding back consumption — then it will drag down overall future growth. This means the current financial year might not see as robust a growth as these overall GDP growth portends. Observers who are more prone to looking at per capita incomes and welfare metrics will justifiably raise a question mark on the bullish sentiment.

The other way in which this gets resolved is by a revision of PFCE data itself. As explained earlier, each growth estimate benefits from better data as the months pass by. Moreover, of all the GDP components, the PFCE is most likely to witness significant revisions.

That’s because PFCE is a residual value; in other words, it is not observed. It is arrived at by deducting all the other values. As months go by, companies and governments tell what they spent and where. As this picture becomes clear, the PFCE is tweaked. Routinely, it experiences the biggest tweaks.

A good example of this can be seen just between the first advance estimates and provisional estimates for FY23 (see TABLE 2).

When the FAEs were released in early January they were based on just the first two quarters data (Apr to June and July to Sept). In the FAEs, India’s GDP was forecast to be Rs 157.6 lakh crore and the PFCE was expected to have contributed Rs 90.2 lakh crore of these. In the PEs released last week, the GDP estimate had gone up to Rs 160 lakh crore — Rs 2.4 lakh crore more — while the PFCE estimate went up to Rs 93.6 lakh crore — or Rs 3.4 lakh crore more.

It is quite likely that when the next revision happens — First Revised Estimates that will be released in February-end 2024 — the PFCE ( and its growth rate in Q4) will be revised upwards.

It is unclear which scenario will play out.

Unsurprisingly, even experts are hedging their bets. Table 3 maps out the various outcomes of Indian growth (and inflation or CPI) trajectory by Morgan Stanley, which has been one of the most bullish voices on India’s growth. The forecast range for the current year varies substantially between 5.6% to 6.8% of GDP growth.

Which of the two possibilities is more likely in your view? Share your queries and convictions at udit.misra@expressindia.com.

By the way, ExplainSpeaking  is now published every weekday.

Until tomorrow,

Udit