It’s the economy, stupid! Growth in all its flavours

June 5, 2024

We love India Data Hub’s weekly newsletter, ‘This Week in Data’, which neatly wraps up all major macro data stories for the week. We love it so much, in fact, that we’ve taken it upon ourselves to create a simple, digestible version of their newsletter for those of you that don’t like econ-speak. Think of us as a cover band, reproducing their ideas in our own style. Attribute all insights, here, to India Data Hub. All mistakes, of course, are our own. 

The economy is growing

We have new GDP data in. And here’s the biggie: last quarter, India’s GDP was 7.8% higher than the March quarter a year ago. It’s a bit of a decline from the December quarter, when we grew by 8.6% year-on-year. All-in-all, though, through the last financial year, India’s economy grew by 8.2%. 

That’s a blockbuster year. For context, it’s a full 1.2% higher than we grew last year, and we were an economic outlier then as well!

Now, there’s another GDP-like indicator we look at to measure economic growth: ‘Gross Value Added’ or ‘GVA’. We’ve explored it in some detail before, but to put things very simply, a country’s GVA is its GDP stripped of any impact from indirect taxes and subsidies. In that sense, it’s a purer measure of the business that’s happening within a country. 

Directionally, our GVA figures are similar to our GDP figures. That is, they tell us that we grew faster in the March quarter this year than the last, and that, as a whole, this financial year has been better for us than the last. Curiously enough, however, our GVA has grown at a much slower rate than our GDP. We saw a similar divergence last quarter as well. See this graph for more:

Why the difference? We’re not sure. 

Meanwhile, it looks like we’ll continue our current growth spurt this financial year. By current estimates, our economy will be 7% larger by the end of this financial year than it was at the beginning. That’s less impressive than last year’s 8.2%, but it’s not bad at all.

In the six years before the pandemic, we were growing at an average of 7.2%. We’re back there by all accounts! Whatever else the pandemic may have done, it certainly hasn’t brought our economy to its knees.

More tax, but companies lag 

The central government’s tax collections have seen double-digit growth in March and April, after falling in February. Personal income tax collections, specifically, have leapt up by 20% in the last three months. 

There’s a grey lining to this silver cloud, though. Corporate taxes have fallen precipitously over the last three months.

See, companies don’t pay all their taxes in one go. Instead, they pay ‘advance tax’ throughout a fiscal year. In March, they “true up” things, tallying what they were supposed to pay against what they’ve already paid. Then, they pay the government whatever they still owe. Now, this March, corporate tax collections fell by 15% year-on-year. In essence, companies overestimated how much tax they were to pay through the year, and in March, found that they had paid more than they had to. So they paid less in March. 

The amount of advance tax a company pays is a function of what it thinks it’ll earn over the year. So, if companies find that they’ve paid extra tax, it’s because their actual earnings were less than they hoped. 

That’s a problem, and one we should keep a close eye on. After all, an economy with less profitable companies grows slower. 

Aaj nagad, aaj hi udhaar

Notice two things in the graph below: 

  1. Bank credit in our economy has grown at a stable rate for the better part of two years, at around the 16% mark. 
  2. Bank deposits, too, have grown at a lower but stable rate of around 12%, for a year. 

Think about the business model of a bank: banks take money in as deposits, and lend it out as credit. So, when their lending starts growing at a faster rate than their deposits, a higher-and-higher portion of the cash they have is given out as loans! 

That’s precisely what’s happening in India’s banking sector. The ‘loan-deposit ratio’ of our banking system has been inching up steadily. Midway through last month, it was almost at 78% — 2% higher than last year, and 4% above where it has been on average for the last 15 years. 

As the loan-deposit ratio goes up, there remains less-and-less room for banks to give loans. Three things can happen, in such a case (or, more likely, a combination of these): 

  1. The RBI lowers its repo rate. This will bring more liquidity into the system, by lowering the ‘cost’ banks have to pay for new money. 
  1. Banks might try to draw more money as deposits. SBI, for instance, has hiked the rates it is offering for fixed deposits. 
  1. Banks will charge more interest on the loans they give. That’ll help them earn better profits on the little money they do have to give out, and might let them tap into more expensive sources of capital. Like certificates of deposit, as you’ll soon see. 

Certificates of deposit rise

Here’s one way banks are looking for extra money to lend out: they’re issuing more ‘certificates of deposit’ (or ‘CDs’). These work like fixed deposits: you lock in your money for some time, and get to earn a nice, fixed interest on it. Banks usually issue these for a few months, to get through their short term money crunches.

You’re likely to see more of these around when there’s less money in the system. That’s when banks that don’t have a lot of deposit-making customers need to look elsewhere for capital. 

And sure enough, they’re up now. Over the last three years, the annual issuance of CDs has jumped up 6x. The total amount outstanding on these CDs has jumped up 4x over the same time. While bank deposits have been growing in the low teens, as we saw before, CD issuances have been growing by 20%. The gap between the two, as a result, has shrunk to the narrowest it has been since 2018. 

As banks find themselves with less money to lend, these are the sorts of expensive sources they need to fall back on. 

Housing prices remain stable (except where they don’t)

Here’s some good news if you’re trying to buy a house in a big city: if you look at prices from last year, and then again this year, you’ll find that they’ve risen by very little. In India’s 10 biggest cities, the median increase in housing prices was 1.7% this March quarter, compared to the last. 

Sidenote: Here’s what the ‘median increase’ means. Imagine you had a list of how much the prices of all houses increased (or decreased) in the last year, arranged in ascending order. If you went to the exact centre of the list, that house would have increased by 1.7%. That is, there are as many houses where prices rose by less than 1.7%, or where prices fell, even, as there are houses where prices went up by more than that. 

The median price rose by less than 1% in major cities like Mumbai, Delhi and Lucknow. It actually went down in Jaipur.

All of this would be of little solace to you, however, if you want to buy a house in Bengaluru (where they went up by 9%), or Ahmedabad (where they were up by 12%).

That’s all for the week, folks! Thanks for reading. 

Senior writer at Zerodha

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