Foreign brokerage HSBC on Wednesday estimated GDP growth slowing down to 6% for the April-June period, as against the 6.1% in the preceding quarter, but said Gross Value Added (GVA) growth should be the number to watch from here.
"Repercussions of an early budget and the newly implemented Goods and Services Tax (GST) rates, receipts and rebates are likely to distort upcoming GDP readings... It's a good idea to focus on GVA growth over GDP (Gross Domestic Product) growth," it said in a note.
The GVA growth will accelerate to 6.2% for the April-June period on a year-on-year basis, up from the 5.6% in the preceding March quarter, which saw the negative impact of demonetisation. It was, however, quick to add that despite the higher number, the 6.2% GVA growth is "soft".
Explaining the lower GDP growth as against the GVA growth, it said a large subsidy outgo will likely depress the net indirect taxes (NIT) growth which will result in slower GDP. Stating that GDP contains more information than GVA, HSBC elaborated that it is GVA plus the net of indirect taxes (which is indirect taxes minus subsidies). Still, GVA is the preferred number to gauge the economic momentum because the NIT is likely to be fraught with data issues, it concluded.
The early budget has resulted in a front-loading of subsidies, HSBC said, adding that food and petroleum subsidy bills grew at 60% and 190%, respectively, for the first quarter.
"This increase in subsidy payout could depress NIT, only to sharply reverse over the next few quarters. All else being equal, it could also lead to the GDP growth print coming in lower than the GVA growth print for the April-June quarter," it said.
Secondly, GST collections and rebates could distort GDP prints from the second quarter onward, it said, adding that the GST rates regime could also distort upcoming GDP prints. The government is expected to come out with its official growth estimates for the first quarter on Thursday.