India's blowout GDP based on data distortion that masks slowdown

• Government reported GDP growth of 8.4%, beating all estimates
• One key measure of activity shows slowdown in economy

India's surge in economic growth to above 8% last quarter was distorted by a single category, economists said, suggesting the strong numbers may not be repeated as other signs point to slowing momentum.

Gross domestic product rose 8.4% in the final three months of 2023 compared with a year ago, the Statistics Ministry said Thursday, beating all forecasts in a Bloomberg survey. Economists said an unexpected drop in government subsidies was the main reason for the surge, giving an artificial boost to the net indirect tax category used to calculate GDP.

A more representative figure of economic activity that strips out those one-off items rose by 6.5%, growth that was more in line with expectations and showed a slowdown from the previous quarter.

"The extraordinary GDP surprise in the fourth quarter of 2023 was due to transient factors and growth is expected to slow," Dhiraj Nim and Sanjay Mathur, economists at Australia & New Zealand Banking Corp., wrote in a note. "But it is unlikely to slow alarmingly."

Financial markets were fairly upbeat on the data, with stocks in India surging the most in nearly a month. The benchmark BSE Sensex index was on pace for a record close, while the rupee gained.

The surprise data comes just weeks before India heads to elections, with Prime Minister Narendra Modi seeking to extend his decade in power. The government also upgraded its growth projection for the current fiscal year through March to 7.6% from 7.3%, keeping India on track to be the world's fastest-growing major economy.

The distortion in the GDP data sets up a debate over whether the Reserve Bank of India will stay on guard as it tries to bring inflation down to its 4% target. The central bank has kept interest rates unchanged and stuck to a relatively hawkish policy stance for several months, although some policy committee members argue that keeping borrowing costs too high could stifle economic growth.

The GDP figures were distorted by the category for net indirect taxes, which is calculated by subtracting subsidies from indirect taxes. Indirect taxes grew just 0.7% from a year earlier, but subsidies plunged almost 54%. That pushed up the year-on-year growth rate in the indirect tax category, according to economists including Garima Kapoor of Elara Securities India Ltd.

The government's bill for fertilizer subsidies, for example, plunged about 70% last quarter from a year earlier, largely due to falling prices, according to Bloomberg calculations.

Economists said gross value added, which excludes net indirect taxes, was a better measure of underlying momentum in the economy.

The beat on GDP spurred economists to upgrade their growth forecasts for the coming fiscal year beginning in April. Barclays Plc raised its projection to 7% from 6.5%, while Citigroup Inc. hiked it to 6.8% from 6.5%. Deutsche Bank upgraded its estimate by 20 basis point to 6.5%.

"The revisions in the recent growth data show India is already an 8% growth economy and accelerating, which sets it apart from the rest of the world," said Rahul Bajoria, an economist at Barclays. "Investment numbers suggest an ongoing pickup in capex momentum."

V Anantha Nageswaran, India's chief economic adviser, said strong domestic demand and private investments will continue to drive growth. "The Indian economy is ticking many boxes in the right manner," he told reporters in New Delhi on Thursday.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.