Radhika Rao, Sr Economist & Executive Director, DBS Bank, says “if we look at the real GDP, I do not see any justification that the authorities might find to go too dovish too fast. Even this real rate gap that we all refer to, even that kind of loses the debate if this is the kind of growth momentum we are carrying. So, net-net, we will certainly wait for one more quarter of data. I think backward revisions need to be factored in and this kind of a gap between GDP and GVA in two quarters might normalise so that we might see real GDP adjust lower.”
What is your first take of the completely divergent GDP number that has come in at 8.4%. What were you pencilling in? Radhika Rao: I think we were at about 6.8% for the real GDP and expecting the GVA to be about 6.5-6.6%. I think our GVA number is along what the print is, but the real GDP is certainly seeing a very strong upside surprise. In fact, we did a double take to see it was in fact, 8% plus! That means for the three quarters of the fiscal year, we are actually averaging about 8%, a massive upside surprise to the RBI’s forecast, our forecast, as well as certainly what the advanced estimates were suggesting.
But when you talk about the real sectors, agriculture, for example, the data is just coming in, from what I gather farm growth has actually slowed down much more than we had anticipated and seems to be in a slight negative. I hope I am seeing the right set of numbers. But you have got manufacturing growth that has picked up to about 11.5% and services doing well as well. So, the non-farm part of the economy seems to have done well.
Farm output continues to lag the GVA part of the story and that is why we have seen a bit of a slowdown on the GVA headline number. I would also be looking at backward revisions. We need to remember a bunch of three annual numbers in the past three years, plus a second advanced estimate for fiscal 24, all of that is going to be presented. So, the base storyline could certainly change and feed into the 8.4% that we are seeing at this point.
Do you think this kind of a big upside surprise is sustainable going ahead?
Radhika Rao: Certainly. We should really look at the real sectors and the contribution thereof, so I think GVA certainly gives you a good idea of what is happening in the undercurrent and that is broadly along expectations. Farm sector has been under weather disturbances, shortage in terms of production, all of that has been impacting output. We are going into FY25 expecting a normal monsoon, but weather has been lately really a wild card in most countries.
But the non-farm segment is certainly doing well. I would think that the undercurrent about the economy should be much more at this point when looking at the GVA, because usually the gap between a GVA and GDP is anywhere between 20 and 30 basis points, sometimes even 10 basis points. You are certainly seeing more than a percentage to percent kind of gap this month.
So, it requires a deeper dive to see where this is going. But if we were to take the GVA as our real sectoral group, we are finding ourselves above 7%. I think that is certainly a positive storyline. We have a full year real GDP forecast of about 7.1%. Now, with a run rate of about 8% percent, we will have to see how that factors out, so probably give two estimates, one for GVA and one for real GDP. With this scenario and back in February, when the central bank met and shared their view on growth, everybody was of the view that it is quite a Goldilocks kind of situation, so they had expected growth to be 7% for the third consecutive year in fiscal 25, inflation slightly above target.
Now in that kind of a backdrop, we are seeing GDP numbers averaging about 8%. If we look at the real GDP, I do not see any justification that the authorities might find to go too dovish too fast. Even this real rate gap that we all refer to, even that kind of loses the debate if this is the kind of growth momentum we are carrying. So, net-net, we will certainly wait for one more quarter of data. I think backward revisions need to be factored in and this kind of a gap between GDP and GVA in two quarters might normalise so that we might see real GDP adjust lower.
