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Another round of data is out for the growth in India's Gross Domestic Product (GDP), and it continues to confuse economists. This confusion first started when the government revised its formula for GDP calculation and announced the new set of data as per the new formula. Suddenly, the Indian economy grew at a faster rate than the sub-5% rates earlier. The country became one of the fastest growing economies in the world, even beating China.
Data for growth in the April-June quarter, however, disappointed many. India's Gross Domestic Product grew 7%, slower than the previous quarter's 7.5%.
Amidst such confusing data, many economists call for a focus on the growth in Gross Value Added or GVA.
Here are some things to know:
What is GVA?
When you buy goods and services, the amount you pay is called the selling price. For a company to be profitable, this price has to cover all its costs like raw material prices, employee salaries and so on. The difference between the selling price and the cost price is the company's profit. But what if technology makes it cheaper for the company to produce these goods; at the same time, demand is so high that consumers are willing to pay a slightly higher price. This means, the goods' value has suddenly increased. The Gross Value Added (GVA) measures this rise in value on a nationwide scale.
How is GVA calculated?
GVA is measured by deducting the government's indirect taxes from the total GDP. You then add the government's subsidy payments to the amount. What this means is, the GVA only takes into account all the money spent on the economy. The GDP, meanwhile, calculates how many goods and services have been produced in the country.
Why is it important?
Many economists consider GVA to be a more important indicator of the economy's progress than the GDP. In fact, even the Reserve Bank of India (RBI) uses the GVA data to decide the economy's future outlook. This is because the GDP also takes into account people's tax payments. This, though, need not contribute to the economy directly. Sometimes, GDP could grow simply because of a rise in tax payments, which can happen by a simple rise in tax rates. It does not necessarily mean that people actually produced or bought more goods and services. In such times, the GVA can be a more accurate representation of economic growth.
Contrarian view
There are many who still prefer to use GDP data to measure economic health. "We should definitely look at GDP numbers as that reflects the health of the economy," D K Joshi, chief economist at CRISIL, a credit rating agency said. The idea is that tax payments may still play a role in overall economic health.
Decoding Q1 data
Recent economic growth data throws sharp relief on the GDP-GVA difference. If you look at the GDP data, India grew at a slower rate in April-June in comparison with the previous quarter. However, in terms of GVA, growth actually accelerated to 7.1% from 6.1% in the March quarter. GVA data can be used to point out which sectors contributed to overall economic growth. In the June sector, the services sector contributed the most to growth. This can be seen in the fact that if you keep out agriculture, defence and government services like public administration, then the country's GVA grew 8.8%. This is much higher than the total GVA growth of 7.1%. Also, the construction sector, key for job creation, grew at a faster pace of 6.9%, up from 1.4% in the March quarter. This could be a reflection of the government's projects in the road and infrastructure sectors.
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Data for growth in the April-June quarter, however, disappointed many. India's Gross Domestic Product grew 7%, slower than the previous quarter's 7.5%.
Amidst such confusing data, many economists call for a focus on the growth in Gross Value Added or GVA.
Here are some things to know:
What is GVA?
When you buy goods and services, the amount you pay is called the selling price. For a company to be profitable, this price has to cover all its costs like raw material prices, employee salaries and so on. The difference between the selling price and the cost price is the company's profit. But what if technology makes it cheaper for the company to produce these goods; at the same time, demand is so high that consumers are willing to pay a slightly higher price. This means, the goods' value has suddenly increased. The Gross Value Added (GVA) measures this rise in value on a nationwide scale.
How is GVA calculated?
GVA is measured by deducting the government's indirect taxes from the total GDP. You then add the government's subsidy payments to the amount. What this means is, the GVA only takes into account all the money spent on the economy. The GDP, meanwhile, calculates how many goods and services have been produced in the country.
Why is it important?
Many economists consider GVA to be a more important indicator of the economy's progress than the GDP. In fact, even the Reserve Bank of India (RBI) uses the GVA data to decide the economy's future outlook. This is because the GDP also takes into account people's tax payments. This, though, need not contribute to the economy directly. Sometimes, GDP could grow simply because of a rise in tax payments, which can happen by a simple rise in tax rates. It does not necessarily mean that people actually produced or bought more goods and services. In such times, the GVA can be a more accurate representation of economic growth.
Contrarian view
There are many who still prefer to use GDP data to measure economic health. "We should definitely look at GDP numbers as that reflects the health of the economy," D K Joshi, chief economist at CRISIL, a credit rating agency said. The idea is that tax payments may still play a role in overall economic health.
Decoding Q1 data
Recent economic growth data throws sharp relief on the GDP-GVA difference. If you look at the GDP data, India grew at a slower rate in April-June in comparison with the previous quarter. However, in terms of GVA, growth actually accelerated to 7.1% from 6.1% in the March quarter. GVA data can be used to point out which sectors contributed to overall economic growth. In the June sector, the services sector contributed the most to growth. This can be seen in the fact that if you keep out agriculture, defence and government services like public administration, then the country's GVA grew 8.8%. This is much higher than the total GVA growth of 7.1%. Also, the construction sector, key for job creation, grew at a faster pace of 6.9%, up from 1.4% in the March quarter. This could be a reflection of the government's projects in the road and infrastructure sectors.
Get free stock market and Indian economy updates in your email by filling your email id in the subscription box.
