Most analysts had forecast GDP growth in the latest quarter to range between 6.5 per cent and 7 per cent. The higher estimate for the October-December period also prompted the government to revise the full-year growth forecast for FY 2023-24 to 7.6 per cent, from its January projection of 7.3 per cent. It also revised the quarterly GDP growth estimates for the first two quarters – April-June and July-September – to 8.2 per cent and 8.1 per cent.

The government statement did not explain the unexpected spike in output during the October-December quarter. Disaggregated data on consumption expenditure and sectoral performances were not immediately available for a more informed view.

A part of the reason for the higher estimates could be attributed to a downward revision in the GDP estimates for 2022-23, especially in the case of manufacturing output. Also, the divergence between Gross Value Added at Basic Prices and Gross Domestic Product is unusually high.

The government has kept the GVA growth forecast, which is a more reliable indicator of expansion in economic activities, for 2023-24 unchanged at 6.9 per cent, while revising the GDP growth number upward from 7.3 per cent to 7.6 per cent.

Simply put, one gets the GDP number by adding product taxes net of subsidies to the GVA figure. In other words, if indirect tax collections shoot up and subsidies are kept under check, it tends to push up the GDP number and result in a greater divergence from GVA.

The divergence between growth rates of GDP and GVA has increased from none in April-June to 0.4 percentage points in July-September and 1.9 percentage points in October-December. While GDP growth for the quarter is estimated to be 8.4 per cent, GVA growth is pegged at 6.5 per cent.

“This wide gap followed from a surge in the growth of net indirect taxes to a six-quarter high of 32 per cent in this quarter, which is unlikely to be sustainable,” said Aditi Nayar, Chief Economist at rating agency ICRA. “In our view, it may be more appropriate to look at the trend in the GVA growth to understand the underlying momentum of economic activity,” Nayar added.

Also, GVA growth shows that recovery of the economy has slowed in Q3 FY24, as support to companies’ profit from lower input costs wanes, said Gaura Sengupta, economist at IDFC First Bank. “From the expenditure side also overall growth momentum for consumption remains muted with investment remaining the key driver for growth,” Sengupta added.

Needless to say, when these estimates, based on what is called an income approach to calculating national incomes, are reconciled at a later date with estimates based on expenditure, the GDP growth rate will likely see a significant downward revision.

Be that as it may, the latest numbers will likely boost investor sentiments and aid the ongoing rally in the stock market. It will also encourage the Reserve Bank of India to continue with an accommodative stance with respect to interest rates.

At 8.4 per cent, the October-December growth rate is the highest in seven quarters. The last time the Indian economy grew at a faster rate was in the first quarter of 2022-23, when the economy was coming out of the Covid-19 pandemic and grew 12.8 per cent.

There are concerns, however. Much of the buoyancy in manufacturing output has come on the back of higher capital spending, mostly by the government. Consumption spending, especially by the private sector and households, remains subdued. Agriculture is estimated to have seen a contraction during October-December, which is bad news as it would likely keep rural demand from reviving.

“The weakness in the consumption demand is due to its skewed nature towards goods and services, largely consumed by the households belonging to the upper-income bracket,” pointed out Sunil Sinha, Senior Director at India Ratings. “Therefore, it is not broad-based and recovery in consumption demand on a sustained basis will be a challenge,” Sinha added.