The Q1 GDP data ironically bodes well for the economy, even though the growth rate at 6.8% is lower than last year. The main reason for optimism is, it does appear that most of the boxes which represent the prerequisites for high stable growth of above 7% for the year have been ticked.

The seeming contradiction can be explained by the internals of the numbers. GDP is defined as the sum of gross value added (GVA) and net taxes. GVA is the actual growth in production in different sectors that are represented by eight segments. The movement from GVA to GDP is based on the net addition of taxes — the difference between commodity taxes (mainly goods and services tax) and subsidies.

The growth estimates for Q1 were always going to have a downward bias due to the base effect of higher growth last year. The 8.4% growth last year provided this base effect. When one looks at the growth in GVA, there is a lot of comfort as it was 6.8%. This means that GDP growth was lowered to 6.7% due to low growth in the “net taxes” component. This was on expected lines and most sectors witnessed growth roughly as forecast.

There were two positive surprises. The first was manufacturing, which did better than expected notwithstanding that corporate profitability has been low-key this quarter. Gross profits, it should be mentioned, is an important component of value added, with salaries and wages being the other component. The 7% growth is a good sign because as demand moves in the upper trajectory,........

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