OPINION Q1 GDP seen at 6.8%; but this may be the best reading for many quarters to come

Even more worrying, nominal GDP is set to undershoot budget targets, raising risks for corporate earnings, tax revenues, and government spending.

India’s Q1 GDP, which will be announced on Friday, August 29, is expected to come in at 6.8 percent as per a CNBC-TV18 poll of economists. Given the repeated complaints of a slowdown in urban consumption by FMCG companies and durable goods makers, 6.8 percent looks like growth to kill for. However, the concern is that Q1 GDP is likely to be the best quarterly reading this year.

The poll shows that Q2 growth is likely to be 6.4 percent, despite a very low base of 5.6 percent last year, while Q3 is projected to be even lower at 6.3 percent and Q4 at 6.1 percent. And these growth forecasts assume only a 25 percent tariff from the U.S. If the tariffs were to stay at 50 percent for the rest of the year, GDP growth may drop below 6 percent, economists say.

However, the fear of slowdown due to tariffs isn’t the only worry. This time the nominal GDP number will be as important as the real GDP number, because the nominal GDP is likely to undershoot the budget estimates of 10.1 percent by a huge margin. The lower nominal GDP will also depress corporate earnings and tax collections. More importantly, it will mean the real GDP is being overstated. To explain this, let us step back.

Real GDP is arrived at by first calculating nominal GDP, the growth of goods and services at current prices, and then deflating it by the rise in prices or inflation. The NSO deflates a little over 60 percent of GDP with the WPI and 40 percent with the CPI (industry, mining, and part of agriculture are deflated with the WPI, while most of services are deflated with the CPI).

In the April–June quarter, the CPI averaged 2.7 percent and the WPI averaged 0.5 percent. The deflator may therefore come to around 1.5 percent. For an economy where services account for over 60 percent of GDP, deflating 60 percent of GDP with the WPI seems incorrect. It results in India’s real GDP looking overstated in years of very low or negative WPI. Also, a deflator of 1.5 percent in the quarter gone by seems too low, given the rise in the cost of health and education in recent months and years.

The second important takeaway from the low WPI and the lower-than-expected nominal GDP is the impact it has on corporate earnings and on taxes. Companies make more profits when they see both volume and price growth of their products. Low WPI tends to depress corporate profits and this, in turn, depresses taxes.

Already, India’s income tax collection last year fell below budget estimates. On that lower base, this year’s budget estimates factor in a 21 percent growth in income tax against a 17 percent growth last year. This asking rate may be too much, especially given the income tax cuts announced in the budget. In addition, one has to take into account the coming fall in GST collections because of tax cuts. Will the expected shrinking of the revenue kitty force the central government, and certainly the state governments, to cut back on capital spending? If that happens, one of the biggest contributors to GDP in the past few years will go missing this year and contribute to yet more slowdown.

The positive, however, may be that the cut in GST and income tax spurs consumption and makes up in volume what is lost in value. The hope is that along with lower interest rates, higher consumption also spurs some private capex and job creation. If India is also able to negotiate its way out of the 50 percent tariff in a few months, GDP growth may well come in closer to the 6.5 percent projected by the RBI. But this still remains a tall ask in a year when global growth will almost certainly slow due to massive tariff and trade uncertainty.