In Our Opinion: When economic data increases uncertainty

On January 5, 2024, the National Statistics Office released the first advance estimates of GDP growth for 2023-24. These pegged the economy to grow at 7.3 per cent. A few weeks later, on February 29, 2024, the NSO revised the figure upwards to 7.6 per cent in its second advance estimates. Then on May 31, 2024, it released the provisional estimates which pegged growth even higher at 8.2 per cent. And a few days ago, on February 28, the figure was revised further upwards to 9.2 per cent — an increase of 1.9 percentage points since the first estimate was released.

As per these numbers, in 2023-24, the economy grew at a faster pace than it has at any time during the last 12 years, barring the base effect induced bump in the Covid year of 2021-22. Going back even further, the pace of growth in 2023-24 was higher than what was observed in any year even during the boom years of the 2000s (under the 2011-12 series). This is a stunning statistic.

This, however, is not the first time that the GDP estimates for a particular year have been revised. The NSO regularly updates its figures when more data is available. The practice is fairly standard. However, revisions of such large magnitudes raise several issues. First, it is difficult to reconcile this data with broader trends in the economy. Second, as Madan Sabnavis, Chief Economist at Bank of Baroda notes, “substantial revisions of past data make forecasting more challenging”.

If the underlying economic momentum is robust — between 2022-23 and 2024-25, GDP growth is averaging 7.8 per cent, private consumption almost 7 per cent, and investment activities 7.8 per cent — then is there need for continued government support? Or is there more to it? The Centre’s fiscal deficit was 6.4 per cent of GDP in 2022-23, 5.6 per cent in 2023-24, and 4.8 per cent in 2024-25. In the most recent budget it has pegged the deficit at 4.4 per cent in 2025-26.

The commentary from sections of India Inc during this period raises questions about the underlying strength of the economy, especially consumption. For instance, in October 2024, Nestle India chairman Suresh Narayanan also alluded to subdued consumption, saying that the “middle segment”, which is the key market for FMCG players, “seems to be shrinking”. Earlier in May 2024, during an earnings conference, Amit Syngle, managing director and CEO of Asian Paints, had said that “the GDP correlation has really gone for a toss, in the current year. I also feel that today, I am not very sure as to how the GDP numbers are coming.” Syngle added that “if you look at the core sectors, whether it is steel, cement, so on and so forth, nowhere it is correlating with the kind of possibly overall GDP growth in terms of what we are kind of talking of.”

The labour market data also does not point towards a strong underlying momentum over the last several years, either in terms of job creation or wage growth. There are several markers. The share of labour force engaged in agriculture rose from 44.1 per cent in 2017-18 to 46.1 per cent in 2023-24. Over the same period, the share of the workforce that is self-employed increased from 52.2 per cent to 58.4 per cent, and the share of workers in the non-farm sector employed in informal enterprises rose from 68.2 per cent to 73.2 per cent. Further, the average annual real wage growth in rural areas for the five years ending in 2023-24 works out to around -0.4 per cent as per a report in this paper. These trends only indicate weakness in labour markets, with fewer alternatives for more productive, more remunerative employment.

Coming into this year, there were concerns that the growth momentum was slowing down. Data from the NSO had confirmed those fears — GDP growth slumped to 5.4 per cent in the second quarter from 6.7 per cent in the first quarter. However, some had argued that this was a temporary slowdown and that growth would pick up subsequently. Leading economic indicators did also suggest that economic activities had picked up pace in the third quarter. And the latest data does indeed attest to that — GDP growth has picked up to 6.2 per cent in the third quarter, up from the revised second quarter growth of 5.6 per cent.

The NSO’s latest estimates, however, also indicate how steep the fall in economic momentum has been this year, with growth falling from 9.2 per cent in 2023-24 to 6.5 per cent in 2024-25 — a fall of 2.7 percentage points in one year. Further, the 6.5 per cent estimate for this year also implicitly assumes the economy will grow at 7.6 per cent in the fourth quarter. This seems challenging. (There is the possibility of the figures for this year also being revised subsequently).

Attention will now shift to the next meeting of the RBI’s monetary policy committee which is scheduled to be held in April. In its February meeting, the MPC had cut the repo rate by 25 basis points to 6.25 per cent. Data released a few days later showed that prices were trending lower — inflation had fallen to 4.31 per cent in January, from 5.22 per cent in December. As per analysts, inflation is expected to moderate further in February — this will be the last data before the next MPC meeting. With the central bank’s inflation forecasts indicating that real interest rates remain more restrictive than what is needed at this juncture, as some former MPC members have also argued in the past, and considering that there remains uncertainty over the underlying economic momentum, there is a growing possibility of further monetary easing.

Till next week,

Ishan Bakshi