Growth Estimates with Incongruent Trends
Sanjay Roy
THE first quarter year-on-year estimates of GDP for the current FY 2025-26 turns out to be higher than the last year’s quarter one figures. But these are estimates and hence need to be dissected and seen in relation to other official estimates provided by the government. At the outset a 7.8 per cent growth rate in the first quarter of 2025-26 is higher than all the four quarterly year-on-year growth estimates of the previous year. This is important particularly when lot of uncertainty emerges in the global trade relations. But this 7.8 per cent growth in real GDP arrived from a nominal growth in GDP of 8.8 per cent for the same reference period. Nominal values are money values at current prices and GDP growth rate is calculated at constant prices, in this case 2011-12 prices and hence neutralise the impact of inflation.
The difference between nominal and real growth rates suggests that during this period implicit inflation rate was 1 per cent. Notwithstanding the fact of moderate inflation during this period such a low estimate of inflation hardly reflects the reality. The Chief Economic Advisor also predicts that the nominal growth rate of GDP at the end of the current financial year might be less than what is being expected because of benign inflation. Inflation is expected to be low because of predictions of good kharif harvest and expected lowering of prices due to GST reform. We must wait for some time to figure out how the GST reform impacts on actual prices because despite rates declined, for many consumer goods, how and to what extent the benefit will be passed on to the consumer depends upon the responsiveness of consumers with respect to price. Also there has been increase in GST rates for energy and services directly and indirectly which is likely to have impact on final prices of goods and services. However, the government expresses confidence that because of a low inflation rate for the current year nominal growth rate may fall short of expectation but the real growth rate pegged at 6.3-6.8 per cent will be realised at the end of the financial year. The estimates released by the Ministry of Statistics and Programme Implementation on sectoral growth and the growth of components of GDP raises doubts on the GDP estimates.
SECTORAL TRENDS
The growth estimates of the first quarter of 2025-26 pegged at 7.8 per cent is much higher from the first quarter growth estimate of 6.5 per cent for the previous year 2024-25. Firstly, the sectoral trends suggest that agriculture and allied sector is growing at 3.7 per cent and manufacturing at 7.7 per cent, slightly higher from the previous year’s figure 7.6 per cent. Both these sectors therefore show a growth less than the overall GDP growth, which means the driver of the growth must be some other sector and as the figure suggests it is services which is growing at 9.3 per cent. Within the services trade, transport and communication is growing at 8.6 per cent and the fast-growing sectors are finance, real estate and professional services at 9.5 per cent and public administration and defence and other services record the fastest growth of 9.8 per cent. What seems surprising that a high growth of GDP comes along with a low growth in manufacturing and construction and a drastic collapse of growth in public utilities that is electricity, gas, water supply and other utilities.
It is also not very clear what drove high growth in public administration and defence in the recent past. The largest component of this segment is salaries paid to government employees and there is no reason to believe that there has been a significant rise either in the number of government employees or compensation paid to them. Also, if agricultural sector is growing at a slow pace and no increase in the growth of manufacturing, how do we explain the high growth of trade, transport and communication services. Particularly when energy production is almost stagnating recording a growth of 0.5 per cent in the reference period. This can only happen only when the services growth is increasingly being delinked from industrial and agricultural production.
From the demand side of the economy the estimates suggest that private final consumption expenditure accounts for the largest share in GDP of 60.3 per cent and the growth of this consumption expenditure has been 7 per cent that is less than the growth of GDP. Noteworthy that private final consumption expenditure growth has fallen from 8.3 per cent recorded in the first quarter of the previous year. Gross fixed capital formation grows at 7.8 per cent which has increased from the previous year’s figure of 6.7 per cent. The share of capital formation is 30.4 per cent of GDP. Also, it seems that the growth of consumption expenditure is largely spent on services sector. It is interesting to note that according to per capita income India belongs to low-medium economy and hence demand for services growth would largely be confined to low value-added services, but the higher growth recorded in finance and real estate sector indicates some signs of fuelling speculative gains in this sector. Otherwise, if inequality increases, which might be the case, there can be rising demand for financial assets and services as the rich aims to ensure future stream of income by way of purchasing assets.
DECLINE IN KEY INDUSTRIES
The quarterly estimates suggest that manufacturing growth has risen in the current year marginally and growing at 7.7 per cent. But this seems to be incongruent with the other figures related to industry. There has been negative growth in mining and quarrying and sharp decline in the growth of electricity which together with other public utilities shows a growth decline from 10.2 per cent in the previous year to 0.5 per cent in the current year. The growth in the construction sector also has fallen compared to previous year’s quarterly estimates. It becomes difficult explaining the growth of manufacturing if we see the year-on-year growth in key sectors. Production of coal and crude oil has collapsed showing negative growth and growth in the consumption of steel records a steep decline. Sales in commercial vehicles and private vehicles show negative year-on-year growth together with sharp fall in goods transport through railways reflected by decline in growth of net tonne kilometres dropping from 4.5 per cent of the previous year’s figure to 0.7 per cent in this year. All these facts are inconsistent with the growth figures in manufacturing of the first quarter. Although recently released Annual Survey of Industries for the year 2023-24 also indicates a rising growth in organised sector manufacturing output. Also, a low growth in agriculture and allied sector that employs roughly 44 per cent of the workforce and a declining growth in construction sector another major employer of low skilled workers shifted away from agriculture, raises question about the growing demand for services as well as of estimated high growth of private final consumption expenditure. The growth of services which seems to drive the economy is based on increased marketization of service provisions such as health services, education, communication and financial services. The credit induced consumption has permeated all class and social groups and higher dependence on digital transactions have changed certain communication services from discretionary to essential consumption. Indeed, the estimates of growth are encouraging but seems to be not in sync with the sectoral trends as well as with the growth of its components.
