GDP's dirty little secret: Why we should be tracking GVA instead

Mint

13 hours ago

Gross domestic product (GDP) growth rate is the headline number everyone tracks to figure out how the economy is doing. It's time we shifted focus to gross value added, or GVA, which is a more direct measure of the incomes generated in the economy. That's because GDP numbers are affected by random decisions by the GST Council to raise tax rates or by the government to slash subsidies.
Cut subsidies, boost growth. Such a prescription might seem like snake oil for the consumption of the simpleminded. But cutting subsidies has, indeed, been the simple route to boost GDP growth in India. India's GDP growth in the final quarter of 2024-25 was a dramatic 7.4%. The growth in GVA, which is what counts for creating jobs and putting income in the hands of people, was a more modest 6.8%.
The divergence between the growth rates of GDP (6.5%) and GVA (6.4%) has been modest for 2024-25 as a whole. It was starker in 2023-24, when the GDP growth rate was 9.2%, while GVA grew by only 8.6%. The more subsidies are cut, the greater the boost GDP growth gets over GVA growth.
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India is not accustomed to the chainsaw breed of fiscal conservatism that Elon Musk vocally championed before his high-profile breakup with US President Donald Trump. In the US, the notion that cutting welfare expenditure and other subsidies will make for a healthier fisc and a more robust economy is part of the mainstream narrative, at least on one side of the political divide.
The conventional wisdom in Republican circles is that ridding government expenditure of waste and excess would make room for lower government borrowing and lower taxes, and these two would, combined with a dose of deregulation, boost growth.
In India, too, many economists have used this approach – not to genuinely foster growth, but rather to dismiss the government's significant role in the economy by labelling it 'socialism' that curtails capitalist dynamism.
The NDA government came to power as a slayer of big government and socialism. It once portrayed the Mahatma Gandhi National Rural Employment Guarantee Scheme as a monument of national failure. But, in the face of revealed distress in the economy, it has also assiduously funded the scheme, regardless of how this made the 'monument of failure' shine brighter.
There is a big difference between the role the state and subsidies play in an economy like the US and in India, whose per-capita GDP is 3% of the US's $89,000. The way India's GDP is computed allows for a lower subsidy bill to boost GDP, whatever the role of subsidies in supporting subsistence and sustaining growth.
GVA is what really matters
While GDP is the headline number on everyone's radar, what matters for creating jobs and incomes is GVA. GVA and GDP are highly correlated but not quite the same. The total value that is generated in an economy breaks down into gross profits and the sum total of wages and salaries. GDP is the value of all final goods and services produced and sold in the economy, whether for consumption, investment or export, net of the imports that go into the production of those goods and services. By taking into account only the final goods, we avoid double counting. Steel goes into machinery, construction, washing machines and safety pins. We look at only the value of these final goods, and not the value of the steel produced.
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National income can be estimated either from the income side or the expenditure side. Data on income is hard to capture directly on a comprehensive basis, and it is easier to estimate the expenditure on things. When you buy pills, an X-Ray machine, or lab test, what you pay for includes the tax on the good or service. Some of the goods you buy are subsidised by the government, so the price is lower than the actual value – grain from the fair price shop, or electricity in many states for certain classes of consumers are just two examples of this.
So, to arrive at the GVA of the economy, you must add up the total expenditure on final goods and services, which will give you GDP, subtract the taxes borne by these goods and services, and add back the subsidies that artificially lowered your expenditure. In other words, GVA = GDP - tax + subsidy. In other words, GDP = GVA + tax - subsidy. Taxes net of subsidies are called net taxes. So GDP = GVA + net taxes.
For the same level of value added in the economy, you can have a higher or lower level of GDP by raising or lowering net taxes. You can raise net taxes by raising taxes, lowering the subsidy outgo, or both. You can lower net taxes by lowering tax collections or increasing the subsidy bill.
As you can see from the table, when the GVA growth rate increased from 6.7% in 2022-23 to 8.6% the following year, that is, by 1.9 percentage points, the GDP growth rate rose 2.2 percentage points, from 7% to 9.2%. This was effected by reducing the outlays on major subsidies from 2% of GDP to 1.37% of GDP – a decline of 31.5%. Another 15.5% drop in the subsidy/GDP ratio helped boost the GDP number in 2024-25.
To get a grip on economic activity and the incomes it generates, it is more useful to look at GVA, rather than GDP, since GDP is affected by changes to subsidy allocations.
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