'GDP growth to slow down to 6% in Q1, better to track GVA'

Explaining the lower GDP growth as against the GVA growth, HSBC said a large subsidy outgo will likely depress the net indirect taxes (NIT) growth which will result in slower GDP.

Mumbai: Foreign brokerage HSBC on Wednesday estimated GDP growth slowing down to 6 percent for April-June period, as against the 6.1 percent in the preceding quarter, but said 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 (gross value added) growth over GDP (Gross Domestic Product) growth," it said in a note.

The GVA growth will accelerate to 6.2 percent for the April-June period on a year-on-year basis, up from the 5.6 percent in the preceding March quarter, which saw negative impact of demonetisation.

It was, however, quick to add that despite the higher number, the 6.2 percent 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 the 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 NIT is likely to be fraught with data issues, it said.

The early budget has resulted in front-loading of subsidies, it said, adding that food and petroleum subsidy bills grew at 60 percent and 190 percent, 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 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.