GDP AND GVA

1. Context

2. Key Points

• India's gross domestic product or GDP grew by 6.3 per cent in Q2 on a year-on-year basis.
• In other words, it was 6.3 per cent more than the GDP in the same months in 2021.
• MoSPI also reported that India's Gross Value Added (or GVA) in Q2 grew by 5.6 per cent on a year-on-year basis.

3. GDP and GVA

• GDP and GVA are two main ways to ascertain the country's economic performance. Both are measures of national income.
• The GDP measures the monetary measure of all "final" goods and services that are bought by the final user produced in a country in a given period.
• The GDP does this by adding up the total expenditures in the economy; in other words, it looks at who spent how much. That is why GDP captures the total "demand" in the economy.

1. All the money Indians spent on their private consumption (that is, Private Final Consumption Expenditure or PFCE).
2. All the money the government spent on its current consumption, such as salaries (Government, Final Consumption Expenditure or GFCE).
3. All the money is spent towards investments to boost the economy's productive capacity. This includes business firms investing in factories or the governments building roads and bridges (Gross Fixed Capital Expenditure).
4. The net effect of exports (What foreigners spent on our goods) and imports (what Indians spent on foreign goods) (Net Exports or NE).

• The GVA calculates the same national income from the supply side. 
• It does so by adding up all the value added across different sectors. 

• By looking at GVA growth one can understand which sector of the economy is robust and which is struggling.

4.  How are the two related?

• When looking at quarterly it is best to look at GVA data because this is the observed data.
• The GDP is derived by looking at the GVA data.

• As such, if the taxes earned by the government are more than the subsidies it provides, the GDP will be higher than GVA.
• Typically, that is how it is. For the second quarter too, the GDP (at 38, 16, 578 crores) is much higher than the GVA (Which is at Rs 35, 05, 5999 crores).
• The GDP data is more useful when looking at annual economic growth and when one wants to compare a country's economic growth with its past or with another country.

5. GVA data

5.1 Manufacturing sector

• It is a contraction in the manufacturing sector.  In Q2, manufacturing GVA declined by 4.3 per cent. 
• This is significant because manufacturing carries a huge potential for job creation and can soak up excess labour from the agriculture sector.
• The contraction has meant that manufacturing GVA has grown by just 6.3 per cent over the three years since the Covid pandemic; look at the change between FY23 and FY20 in the Chart.
• However, it would be a mistake to believe that only Covid and its after-effects are responsible for the lacklustre manufacturing performance.
• The fact is, as borne by the data, manufacturing GVA grew by just 10.6 per cent between FY 17 and FY20.
• For perspective, it is important to remember that between FY14 and FY17, manufacturing GVA grew by 31.3 per cent. 
• In other words, Indian manufacturing has been struggling to add value for the past six years.
• This would explain why data from the Centre for Monitoring Indian Economy (CMIE) shows that jobs in the manufacturing sector halved between 2016 and 2020.

5.2 Trade and hotels

• Almost 15 per cent growth in services such as trade and hotels etc. 
• This is also a huge sector for job creation. But again, if one looks at the Q2FY23 level and compares it to the pre-Covid level (Q2 of FY20), the growth is barely over 2 per cent.
• That this sector grew by over 26 per cent in the three years between FY17 and FY20 when India was experiencing a serious economic declaration shows how badly it has been affected by the Covid disruption.

5.3 Mining and quarrying

• Another sector crucial for job creation, even though it is smaller in terms of overall contribution to India's GVA, is mining and quarrying it, too, has contracted by almost 3 per cent.
• Looking back over the past six years, it has contracted by 3.5 per cent between FY17 and FY20 and grown by just 2.5 per cent since then.

5.4  Agriculture 

• One positive story emerging from the GVA pertains to agriculture (along with forestry and fishing), which has done better than expected by growing at 4.6 per cent.
• Typically, this is a good growth rate for this sector and has happened despite some worries that the sowing of crops did not happen in time.
• Overall, while the GVA has grown by 5.6 per cent year-on-year, the growth is just 7.6 per cent when compared to the pre-Covid level set in FY20.

6. GDP data 

6.1 Private Consumption Expenditure

• GDP is the biggest engine of growth in private consumption expenditure.
• It typically contributes over 55 per cent of India's total GDP.
• This component is also crucial because if this is depressed, it robs the business of any incentive to make fresh investments; and expenditures towards investments are the second biggest contributors to the GDP, accounting for around 33per cent of the total.
• Data shows that private consumption has grown by a healthy 9.7 per cent over the past year.
• However, the growth is relatively modest just 11 per cent when compared over the last three years.
• That between FY 14 and FY17, this component grew by almost 28 per cent providing some perspective.

6.2 Investment expenditure

• The investment expenditures have grown by 10.4 per cent over FY21 and by almost 21 per cent between FY20 and FY23.
• This is the best growth over any three years going back to FY14.
• This suggests brighter prospects for the economy over the medium term.

6.3  Government final consumption expenditures

• The biggest surprise though from the GDP is the contraction in government final consumption expenditures.
• While these types of expenditures account for just about 10-11 per cent of the GDP, they can prop up an economy during tough times when people and businesses hold back spending.
• Oddly enough, data shows that not only did government consumption expenditure contract by 4.4. per cent in Q2 (Over the Q2 of 2021), but that it is almost 20 per cent below the pre-covid level.

6.4 Net Exports data

• The last component of the GDP equation is the Net Exports data.
• Typically, since India imports far more than it exports, the NX value is negative. 
• In Q2, this negative value swelled by 89 per cent. 
• Over the past three years, this drag on GDP has also increased in size by almost 150 per cent.

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