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Divergence Between GDP and GVA Explained with Examples



  Mar 02, 2024

Divergence Between GDP and GVA Explained with Examples



The divergence between Gross Domestic Product (GDP) and Gross Value Added (GVA) is a critical aspect to understand the underlying dynamics of an economy. This divergence became notably prominent in the Indian economy during Q3FY24, when India reported a robust GDP growth rate of 8.4%, surpassing economists’ expectations of 6.6%. This period marked a six-quarter high in economic performance. However, experts caution that the headline GDP figure warrants a careful interpretation due to several underlying factors.
 

GDP vs. GVA:

GDP represents the total value of all goods and services produced over a specific time period within a country’s borders. It is a broad measure of overall domestic production and a key indicator of the health of an economy.
GVA, on the other hand, measures the value of goods and services produced in an area, industry, or sector of an economy net of indirect taxes. It provides a viewpoint from the production or supply side, calculated as the GDP minus indirect taxes plus subsidies on products.

In Q3FY24, while India’s GDP growth surged to 8.4%, the GVA growth moderated to 6.5%, which was in line with expectations but lower than the GDP figures. This discrepancy or divergence was attributed to a significant jump in net indirect tax growth. The gap between GDP and GVA, which had averaged around 20 basis points (bps) in the last eight quarters, widened to 190 bps during this period.
 

Examples and Implications:

The manufacturing and construction sectors in India showed impressive growth rates of 11.6% and 9.5% YoY, respectively, supported by public capital expenditure (capex). This indicates strong government investment in infrastructure, which can boost GDP figures.
However, private consumption growth was relatively subdued at 3.5% in Q3, suggesting that the domestic demand recovery is not as robust as the GDP figure might imply. A decline in government spending by 3.2% in Q3, from a 13.8% growth in Q2, further complicates the picture.
The agriculture sector witnessed a contraction of 0.8% in GVA growth in Q3, down from 1.6% in Q2, reflecting the sector’s challenges despite the overall economic growth.There is no tax on agriculture.
Luxury goods and services yield high levels of tax unlike essentials.

Conclusion:

The divergence between GDP and GVA in India during Q3FY24 highlights the complexities of economic recovery and growth. While headline GDP figures suggest robust economic performance, the GVA figures, along with sector-specific data, reveal an uneven growth pattern. This divergence, driven by factors such as indirect tax growth and varying sectoral performances, underscores the importance of looking beyond GDP to understand the real state of the economy. The Indian economy’s reliance on public capex for growth, with subdued private consumption and capex, points to the need for balanced and sustainable growth drivers moving forward.

SRIRAM’s


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