India's surprise Q4 GDP numbers: Making sense of them and what's next

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Hari:

Samar, thanks so much for making time for this. Really appreciate it. So, the GDP numbers are out and I understand there's some surprise. Maybe you want to walk us through quickly what's happening and we'll get into that.

Samar:

Thank you for having me, Hari. Well, the GDP numbers were released late evening yesterday and they did surprise on the upside. So what essentially happened was that our foliar growth, which we had been expecting at 7%, was revised to 7.2%. And this was on account of the fact that the GDP number Q4, that is Jan-Feb-March of this year, came in at 6.1%, which was significantly higher than what economists had been expecting. To give you a sense the Economic Times interviewed 20 economists and they all came up with a median figure of 5.1; so this beat by 1% at least that estimated that was a huge beat. So we had done 4.5% in Q3 and as a result of which people thought okay if we if we get out get to about 5% we'll end the year at 7%, which is a credible performance but this number surprises on the upside and so we ended at 7.2%. So it was a beat and yeah some good news for the economy.

Pankti:

So what would you say are the biggest surprises there?

Samar:

So there really were two big surprises and also one negative. So let's start with the negative first. The negative was that consumer spending makes up a large chunk of growth, about two thirds of growth, and that has not been doing too well. And so, you know, when consumer spending doesn't do well, it becomes harder for the other components to sort of pull the economy along. But this time you had government CapEx, which did well. And you also had private sector CapEx, which did well. So fixed capital formation, which really, loosely speaking, is investments, this rose by about 8.9% to go to an all-time high—all-time high for at least the last 20 years—of 35.3%. So that is very good. So government spending did well. Private CapEx is beginning to show signs of doing well. And exports, although they slowed in the last quarter, they've done well for the whole year. So that's the sort of fourth component, net exports. So one not so good thing, but the other three sort of chugged along.

Hari:

In general, do these numbers every quarter, do they offer some signposts, markers, which generally give us a sense of how we are doing, what course corrections are needed, and so on?

Samar:

Well, they do offer some sort of markers. For instance, let's take the case of exports. You've had the government, which has launched this huge PLI scheme of something like 1,95,000 crores over the next five years. And so that should result in a significant uptake in exports. We're at about 440 billion in merchandise exports now, sorry, 440 billion in merchandise exports now, and they have a trillion dollar target by about in the next six, seven years. So things like that should sort of showing up in GDP numbers. And so these changes are gradual, they're incremental, but they do point to the direction of the economy. The consumer, for example, has been hit very hard by inflation in the last 18 months or so. And so it's not surprising that consumer spending is down and that makes up a huge chunk of growth. The government has been talking about government capex and the fact that they want to spend more to get the economy going again. And so that number is beginning to look up. So these, over let's say, not one quarter, but over the... course or say four quarters, they do provide some direction as to where the economy is going and how it's headed, how the various components are headed.

Hari:

And just for folks, you know, a more general audience who may not have taken sort of a very keen interest in this, but is significant to all our lives, historically, what are some of the biggest needle movers in India's GDP?

Samar:

So the biggest needle movers in India's GDP really has been... Okay, so let me explain it this way. Private consumption, which means when you and I go out and consume, that makes up about two thirds, like I've said before, and that is pretty steady. So that 66% can become 69%, but that doesn't really move the needle too much on the upside. What really moves the needle is capex, and both government spending and private sector spending.

So the private sector makes up a bulk of the incremental capex. And so private sector capex is more important. The government can build enough roads, bridges, power plants, et cetera, et cetera. But it's only when the private sector starts spending that it really moves the capex needle very clearly. And there are signs that that is beginning to happen, but the jury is still out as to whether that is recovering in a meaningful enough manner.

And the last big growth spurt that we had between 2004 and 2008, it was private capex that really sort of did a bulk of the heavy lifting. And in many ways, A lot of our problems since then has been due to the fact that so much capacity was created then and nobody really has felt the need to invest ever since then. And so when you say that what really are the large components or I think your question was what moves the needle, I would say it's capex that moves the needle because it really sows the seeds for tomorrow's growth.

Hari:

And so, for this I guess very large sectors like steel and cement and the sort of the old brick and mortar sectors need to really kick in, right?

Samar:

That's correct. The old brick and mortar sectors need to kick in. You also have sectors that could be export facing, things like mobile phones. We've made huge strides in the last 18 months or so. Things like mobile phones, things like electronics, things like specialty chemicals, automobile, auto components as well, all sectors that we're targeting for exports now, if they start moving the needle, then things could begin to look up. And I guess time will tell whether that happens or not.

Pankti:

And what does it mean at a time when other countries, some of the world's biggest economies, are entering recessions? What do these numbers mean for India?

Samar:

So yeah, so I think that was significant. At a time when the global economy is slowing down, and more importantly, global trade is slowing down, the fact that our GDP numbers have not shown a slowdown is significant. But having said that, it's still one quarter's reading. So I would say, let's look at this over the next two, three quarters. And if... And if we don't have a slowdown, then you could say that through some miracle, we've beaten the global trend towards towards slowing growth. But this is just one quarter's reading and it is significant because global trade is slowing down now.

Hari:

Okay, one other question I had in mind was sort of from the Ordinary Joe's perspective. I mean, my rudimentary understanding of this is if these numbers are good, it means that we are a wee bit more of a prosperous nation. Does it affect people on a day-to-day basis?

Samar:

No, I don't think so. Did it affect you? I don't think so (laughs). The fact of the matter is that these changes are incremental. Sure, national income would go up over the course of two, three, four, five years. And so as a result of some inflation and some salary hikes, everyone's income should, ideally speaking, go up. But did it affect somebody at 6 p.m. or 5.30 p.m. when the number was announced yesterday? And did he feel better that it was 6.1 percent and not 5.1 or whatever the estimate was? I don't think so.

I don't think these changes really matter on a quarter to quarter basis or day to day basis. But yes, over let's say over eight quarters or 16 quarters or 12 quarters or 16 quarters, yes. I mean, if our country has grown at 7%, theoretically, your income should be growing by that much plus inflation at least.

Pankti:

Did the markets react at all?

Samar:

No, the markets didn’t. At least this morning they didn't react because I think our markets are just completely dependent now on global factors. And sure, there could be, I mean, let's just say, for argument's sake, there is an election upset next year. Sure, they could react then. But things like a one quarter GDP number, I don't think is enough to move the markets. They're just tied to the hip with global markets and more importantly, the US markets now.

Hari:

Given these numbers, I mean you would have been talking to experts, what's the consensus on what are some of the things we should be doing, what should we be avoiding and I also saw just a headline, I think JP Morgan forecasting 5.4% or 5.5% for FY24 for India's GDP, is that a good number, what's the sense of all of this?

Samar:

Right. In general, in all my years of reporting on the economy, one should not pay too much attention to forecasts because so much can go wrong. And I remember first coming across this in 2011, 12, when we were part of the fragile five and we did very badly in 2013 and no economist in 2012 picked that up. So in general, I won't sort of look too much at forward forecasts.

But having said that, I think the mood amongst economists and rightly so was that this is one quarter's number. Let’s look at it for maybe one or two more quarters and then we'll get a better sense of whether we've beaten the global slowdown. The government's commentators and the government's chief economic advisor, et cetera, they were all very bullish and they were saying, look, we've done so well. And sure, I mean, they can pat themselves on the back, but I would say it's still early days.

Hari:

Very nice, Samar. Anything else you think we should be talking about here?

Samar:

So the only other point that I'd like to make is that, you know, this also comes at a time when the Chinese reopening from COVID hasn't gone as well as expected. And one of the reasons why that is significant is because we end up exporting a lot of raw material things like, you know, iron ore and a lot of things that... in the end go into making parts and making finished goods to China. And so if China is slowing down and China accounts for like almost a fourth of global growth. So if their opening from COVID hasn't gone as expected, it remains to be seen as to how we manage to buck the trend when you know one fourth of global growth is not doing so well. So that's the only bit I'd caution against. Or I'd say you need to keep a close eye on this.

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