June 24, 2022
  • June 24, 2022

What is the story behind the Gdp-gva split?

By on May 31, 2022 0

Again, two measures of the Indian economy – “gross value added” and “gross domestic product” – grew at very different rates. While the change in GDP lagged significantly behind the change in GVA in FY21, the situation was reversed in FY22, according to data released Tuesday. Mint explains:

What is the difference between GVA and GDP?

Gross Value Added (GVA) sums the value of all goods and services produced in an economy after deducting input costs, while Gross Domestic Product (GDP) is a measure of the country’s national income by summing the expenditures in the economy. ‘economy. The main difference is that the latter includes net taxes and removes subsidies, so the two parameters may differ in years of large changes in taxation or subsidies. While GDP is the internationally accepted measure of a country’s overall economic growth, GVA provides sectoral details of economic activity on the production side.

What explains the gap between GDP and GVA?

In FY21, GDP growth lagged GVA growth by 180 basis points, the first such phenomenon in the current series, as the Center booked several years of contributions due to the Food Corporation of India. Food subsidy costs have skyrocketed in a year when tax revenues have been hit hard due to the lockdown. This created a huge gap between GDP and GVA. In FY22, however, tax revenue grew at a rapid rate (28%) due to the rapid recovery in economic activity, while subsidies, although still high, declined. by more than a third due to the base effect. This translated into GDP growth of 8.7%, while GVA only increased by 8.1%.

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The right measure

What is the best indicator to assess economic growth?

GDP and GVA serve their own purpose to understand the economic dynamics of the country. While GDP is the official measure of economic growth in the country, GVA may turn out to be a better measure in exceptional circumstances like in the case of the last two years. Additionally, GVA is the place to go if you need to assess the production of specific sectors.

Was the gap between GDP and GVA there before FY21?

Between FY13 and FY17, GDP growth always exceeded the GVA growth rate, but never by more than 30 basis points. This spread increased to 60-70 basis points in fiscal 2018 and 2019, thanks to large post-demonetization tax recoveries, while subsidies declined year-on-year. In FY20, however, GDP growth was below GVA for the first time, but only by 10 basis points, as tax revenues increased by 3% and grants by 18%. Overall, GDP tends to be higher than GVA, as tax receipts often remain higher than grant payments.

Will the GDP-GVA divergence continue?

Soaring price pressures have forced the Center to announce a range of measures ranging from tax cuts to additional subsidies, both of which will weigh on the GDP print in FY23. a value of 2 trillion would inflate GVA, while fuel tax cuts, which are expected to cost at least 85,000 crore, could depress GDP unless tax revenue from other channels fills the gap. The real impact, however, will not be known until the Statistics Ministry releases the second advance estimate of GDP next year.

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