India’s GDP numbers puzzle economists

First-quarter gross domestic product (GDP) numbers for the April-June quarter came in at a robust 7.8 percent as per most estimates. This is the highest in four quarters. But India’s manufacturing sector story is puzzling, with the sector growing at 4.7 per cent while several estimates had predicted the sector to grow in double-digits.

The 7.8 per cent growth in India comes at a time when various economies around the world are straddling between 1 and 3 percent growth. That appears to be a reason to celebrate. However, economists are a tad wary as they expect growth to slow down in the coming quarters and the current set of estimates to be revised further.

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For the quarter ending June, India grew at 7.8 per cent, against 6.1 percent from January to March, and 13.1 percent from April to June 2022. The agriculture sector grew at 3.5 percent against 5.5 percent in January to March, but higher than 2.4 percent in April-June, 2022. However, economists are puzzled by the manufacturing sector’s growth numbers. Many had predicted the sector to grow in double digits. But data showed the sector grew at a tepid 4.7 per cent compared to 4.5 percent in January-March and 6.1 percent in April-June, 2022.

While growth has come in within expected estimates, there was an expectation that manufacturing will show an uptick, considering the robust earnings reported by companies in the manufacturing sector. One economist explained that they had made their calculations based on the earnings before interest, taxes, depreciation, and amortisation (EBITDA) numbers of manufacturing companies. Several economists had estimated the sector to grow at 17-18 per cent. The disconnect between what was calculated by economists and the government has been a bit perplexing.

State Bank of India (SBI), in its research note issued after the release of data on 31st August, noted the "possible fault lines in CSO data methodology regarding manufacturing, exports and service sector."

While growth has come in within expected estimates, there was an expectation that manufacturing will show an uptick, considering the robust earnings reported by companies in the manufacturing sector. One economist explained that they had made their calculations based on the earnings before interest, taxes, depreciation, and amortisation (EBITDA) numbers of manufacturing companies. Several economists had estimated the sector to grow at 17-18 per cent. The disconnect between what was calculated by economists and the government has been a bit perplexing. Citigroup, for instance, had pegged for manufacturing to grow at 18 per cent.

"Clearly, the government is basing its calculation on the IIP (index of industrial production) data, which is largely reflective of the informal sector, while EBITDA is more reflective of the formal sector," said an economist on condition of anonymity.

India’s construction sector grew at 7.9 percent compared to 10.4 percent in January-March and 16.0 percent in April-June 2022, while private consumption grew at 6.0 percent, up from 2.8 percent in January-March and 19.8 percent in April-June 2022.

India’s consumption story seems to be coming back. However, DK Joshi, Chief Economist at Crisil, noted that while consumption is "reasonably satisfactory, it is largely being driven by urban demand. Rural demand isn’t that strong."

Overarchingly what’s expected is several revisions of the first estimates. Also, many are expecting the momentum to slow down with the impact of monsoons, global headwinds, and interest rate hikes by the Reserve Bank of India (RBI) spilling into the next few quarters.