07 Mar 2017 15:56 IST

All you wanted to know about GVA

Until about two years ago, GDP was all you needed to gauge a country’s economic activity

Economists are at it again, nitpicking the recent GDP growth estimate put out by the Central Statistics Organisation (CSO). Why? Because the 7.1 per cent growth forecast for FY17, remains unchanged from CSO’s earlier estimate. This begs the question: was the hype over demonetisation hurting growth much ado about nothing?

However, a less conspicuous figure put out by the CSO shows moderation in growth. That is the gross value added (GVA). GVA growth has been pegged at 6.7 per cent for FY17, lower than the earlier estimate of 7 per cent.

What is it?

GDP or gross domestic product is a measure of economic activity in a country. It is the total value of a country’s annual output of goods and services. Until about two years ago, GDP was all you needed to see, to gauge a country’s economic activity.

Now, there are other pieces of jargon that you need to know if you have to decode CSO numbers. The gross value added (GVA) is one key number. Over two years ago, the CSO introduced a new method to calculate growth numbers. This differed from the earlier method in many ways. Another key change was to move from factor cost to basic prices. GDP at factor cost represents what the producers in the economy make from industrial activity — wages, profits, rents and capital — called ‘factors of production’, if you jog your memory on economics.

Aside from these costs, producers may also incur other expenses such as property tax, stamp duties and registration fees before sale. These are included in the GDP, but not the GVA. Essentially, GVA captures what accrues to the producer, before a product is sold.

Why is it important?

GVA, under the new method, has assumed importance as it is the closer representation of the economic activity on the ground. The RBI too considers only GVA to spell out its economic projections in its policy reviews.

Adjustments made to the GVA number to arrive at GDP, under the new method, can throw the resultant number out of whack. The growth in the economy under the old series was gauged by the growth in GDP at factor cost — period. Now the headline GDP growth is adjusted for net indirect taxes — indirect taxes are added while subsidies are subtracted from GVA. This is to reflect the price paid by the consumer. But at different points in time, GDP and GVA have been telling different stories.

For instance, in its recent revision, the CSO has lowered its GVA growth by 30 bps to 6.7 per cent for 2016-17. But indirect taxes growing at a sizzling pace (24 per cent until January) and shrinkage of subsidies led to higher growth in net indirect taxes, and hence GDP. Thus, the difference between GDP growth and GVA growth has increased substantially to 40 bps for 2016-17, compared to just 10 bps in 2015-16.

Hence it makes sense to look at the GVA number to do a sectoral or historical comparison of economic activity. But if you are looking to compare India with the rest of the world, then GDP would be the number to go by.

Why should I care?

How the economy is doing is critical to your job prospects and your annual pay hike. A higher GDP is usually good news, implying better living standards for the country at large.

For the investor, the implications are more direct — a higher growth in the economy will mean better corporate earnings. Higher GDP or GVA growth in India may also lure more foreign investors to pour capital into the country.

The bottomline

GDP or GVA, do pay attention, as the devil is in the details.

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