What latest estimates of India’s GDP say about the economy

On Friday, the Ministry of Statistics and Programme Implementation released three sets of GDP estimates.

* GDP for the third quarter (October to December) of the ongoing financial year. This data would tell whether the slump in Q2 was a one-off or part of a trend.

* GDP forecast for the full year. These are called the Second Advance Estimates (SAE) and are essentially a forecast of India’s GDP by the time the financial year ends on March 31. The SAE were preceded by First Advance Estimates (FAE) that were released in January. The key thing to watch out here was whether the underlying growth momentum since the slump in Q2 was considered good enough to lift the overall GDP growth rate in the country. The FAE had pegged the GDP growth rate at 6.4%; in other words, India’s GDP was expected to be 6.4% higher than the previous year.

* GDP estimates for the preceding two financial years. These are called the First Revised Estimates (FRE) of FY24 and the Final Estimates of FY23.

Why so many revisions?

While the government releases GDP estimates for each quarter, it does so based on the initial set of data it has collected and uses some assumptions and calculations to arrive at the GDP estimate.

As time goes by, more and better quality data are available with the government, which updates or revises the GDP number for each quarter and, as a consequence, for each year.

Typically, apart from quarterly GDP estimates, there are five rounds of GDP estimates for any particular year. These are:

* The FAE release in January of the relevant financial year;

* The SAE released in February of that year;

* The Provisional Estimates (PE) — this include the data from Q4 or January to March quarter — in May;

* The FRE in February a year later; and

* The Final Estimates in February, two years later.

What are the GDP updates?

On the whole, the GDP updates were positive but the highlight was the kind of revisions that took place for past quarters and years.

As far as quarterly GDP is concerned, India’s GDP in Q3 grew by 6.2% (over the same quarter last year) and MoSPI also revised the Q2 GDP growth rate from 5.4% to 5.6%.

For the previous financial year (2023-24), the GDP was revised sharply from 8.2% to 9.2%. The FAE for FY24 (which were released in January 2024) had pegged the GDP growth at 7.3%. As such, the growth rate has been revised up by 1.9 percentage points in a year’s time.

Similarly, the GDP growth rate for 2022-23 or FY22 was revised up from 7% to 7.6%.

Do GDP estimates go through large revisions?

The table alongside shows the GDP revisions for each of the past six financial years to provide perspective to the rate of revisions that have been brought about this time.

FY21 — the year when India underwent a technical recession due to the Covid-induced nationwide lockdowns — saw substantial revisions in GDP estimates. This is understandable as data gathering and data quality also took a severe hit that year.

But for other years, the revisions are most often less significant. For instance, FY22 started off with an estimate of 9.2%, and after varying in a narrow band, ended up exactly where FAE pegged it.

In this context, the sharp upwards revision for the previous financial year stands out. A difference of 1 percentage points between the Provisional Estimates (released in last May) and the FRE released on Friday is even more than the difference in the Covid year (FY21).

What is the significance of the sharp upward GDP revision?

GDP data provide the bedrock of understanding for the Indian economy. Weaker GDP data point to weaker tax collection for governments and lower profits for corporate India. These, in turn, have implications of their own.

For instance, one of the biggest reasons why Indian stock markets are getting punished by foreign investors currently is the slump in corporate earnings.

At a macro level, before it was revised on Friday, the FY24 GDP data suggested that private consumption demand in India — that is the money spent by Indians in their individual capacity for everyday activities be it buying a car or a shampoo — had slumped. This private consumer demand is the biggest contributor or “engine” of India’s GDP growth and, before Friday’s revision, it was pegged at a growth rate of 4% in FY24. After revision, it is pegged at 5.6%.

In fact, even in the revision for FY23, the private consumer demand has seen a significant uptick.

On the face of it, these are substantial shifts in momentum and suggest that private consumption demand was not weakening as much as previously understood.

In fact, in the current financial year it is the private consumer demand which is pulling up the GDP growth rate — far more than other engines of GDP growth such as government’s spending or the spending by the private sector towards new capacities such as factories.

In essence, the revisions upend the existing understanding of the internal dynamics of the Indian economy — what is holding back growth and what is propelling it.

What is the upshot?

There are three main takeaways:

* Until last March, India’s economy was doing much better than previously understood.

* The slump in India’s growth momentum in the current financial year is sharper than previously imagined. The deceleration in GDP growth rate now is from 9.2% to 6.5%.

* Sharp revision of data undermines both the reading of the Indian economy and the credibility of the official estimates.