GST, Company Data Show Slower Economic Activity Than 11.5% GVA Growth

Nominal GVA grew 11.5% in Q1 FY27, while GST collections grew only 7.2%. How significant is this divergence?

There has been considerable debate around the GDP numbers released for the first quarter of FY27. The reported real GDP growth of 7.8% appeared significantly high, so we looked at alternative data points to assess what the underlying growth could be.

GST is an important indicator because it is a tax imposed on value addition across the economy. In Q1 FY27, reported GST collection growth was around 7.2%, which is significantly lower than the 11.5% nominal GVA growth.

Historically, these two indicators have broadly moved together. In the first half of FY25, GST collection growth was around 9.3%, while GVA growth was about 9.2%. In the second half of FY25, GVA grew 9.3% and GST collections around 9.5%. Similarly, in the first half of FY26, GST grew 8.9% while GVA grew 8.6%.

The divergence became much more pronounced in the second half of FY26. Nominal GVA growth was reported at around 9%, while GST collection growth was only 5.3%. That divergence continued into the first quarter of FY27.

This suggests that some downscaling of the headline GVA growth may be required. We also examined corporate data and the informal sector, and these indicators provide further evidence of considerably lower nominal GVA growth.

Import-related GST has grown much faster than domestic GST. What does this tell us about economic activity?

There has been a significant change in the composition of GST collections. Around the end of 2024, import GST accounted for roughly 20% of total collections. That has risen to almost 30%, while the contribution from domestic activities has fallen from around 80% to 70%.

In Q1 FY27, domestic GST collection grew by only about 0.2% year-on-year, while import GST grew 33.6%. On a year-to-date basis through August, total net GST collections were around ₹8.9 lakh crore, of which ₹6.5 lakh crore came from domestic GST and ₹2.4 lakh crore from imports. Import GST grew roughly 30.4%, while domestic GST grew only 2.7%.

This suggests that sectors dependent on imports, including companies importing and selling in India and manufacturing sectors with high import intensity, may have had better pricing power and generated higher gross value addition.

The broader implication is that domestic demand and domestic economic activity may not have grown as strongly as the GVA numbers suggest.

Your analysis of manufacturing companies shows a 4.5% contraction in nominal value added, while manufacturing GVA is officially reported to have grown 7.7%. How do you explain this difference?

Nominal manufacturing GVA was reported to have grown 7.7% in the first quarter, with a deflator of minus 1.5%, which implies real growth of more than 9%.

We wanted to test this against the organized manufacturing sector. We aggregated the quarterly financial performance of around 1,880 manufacturing companies, which is a very large sample.

Their net sales grew 25.5%, but raw-material costs grew almost 40%. Gross value added can broadly be understood as the value of output sold, represented by net sales, minus raw-material costs. On that basis, value added contracted by roughly 4.5%.

This is clearly different from the reported 7.7% nominal growth in manufacturing GVA.

Companies have also been trying to economize on other operating costs, including wages, salaries, other operating expenses, interest costs and tax provisions. Despite this cost optimization, overall gross profit or gross value added contracted by about 4.5%.

Gross profit margins also declined by roughly 700 basis points to around 22.7%. Adjusted net profit declined by approximately 12.2–12.5%.

Therefore, corporate data does not reflect the kind of growth that the reported manufacturing GVA numbers suggest.

What about the unorganized sector? What can we infer from the available data?

If the organized sector is facing considerable cost pressure and companies are unable to fully pass on rising costs, the unorganized sector could be facing an even more severe situation.

The government’s quarterly survey of unincorporated enterprises shows that the number of enterprises increased by roughly 9.2% year-on-year, while the number of workers employed increased by about 6.5%.

At the same time, there has been a significant decline in both establishments and employment in the high-value trade-services segment. Workers appear to have moved into other services activities and, to some extent, manufacturing, but largely into lower-value-added services.

Disturbances caused by rising fuel prices and geopolitical tensions, particularly in urban areas, may have contributed to people moving back to rural areas or shifting into other sectors. This has changed the composition of unincorporated enterprises in favour of lower-value-added activities.

The annual data available until December also showed that average value added per enterprise was growing by only about 3%. Given rising costs and the shift towards lower-value-added activities, it is quite possible that value addition contracted in the first quarter even in the unorganized sector.

So, what does your overall analysis suggest about nominal GVA and real GDP growth?

If we combine the evidence from organized manufacturing, the unorganized sector, Nifty 500 companies and GST collections, the reported nominal GVA growth of 11.5% appears considerably higher than the underlying economic activity.

For Nifty 500 companies, we found gross value addition growth of around 5.5–6%, which is also substantially below the 11.5% reported for the overall economy.

GST growth also appears more consistent with a slower pace of activity. The reported 7.2% GST growth excludes the GST compensation cess from last year’s base. If that amount is added back, the actual growth is around 1.3%. On an unadjusted basis, first-quarter GST collections were flat.

Taking all these indicators together, we believe nominal growth is realistically not beyond 7%. After incorporating the deflator used in the official calculations, GVA could be closer to 4%, while real GDP—the expenditure-side measure—could also be below 4%. Our analysis therefore suggests actual real GDP growth could be closer to 4%, compared with the reported 7.8%.

What data points should investors, companies and policymakers watch over the next two to three quarters?

It is not only investors who need to look at these indicators. Companies and policymakers also need more granular information.

Headline GDP numbers do not necessarily correlate with how companies are behaving in terms of hiring, fixed investment and cost management. Rising raw-material costs and compressed margins can influence employment and investment decisions.

Investors should therefore watch how corporate margins are progressing and how demand is evolving. GST collections are particularly useful because they capture economic activity across manufacturing, services and transactions.

The decomposition between import GST and domestic GST is also important because it gives a better sense of underlying domestic momentum.

The cost side should be monitored as well. If companies increasingly pass on higher costs, retail inflation could rise. Food prices remain an important risk. Interest rates are another factor, particularly if global rates and domestic inflation move higher.

Apart from GST, which other indicators should economic agents watch?

There is a whole range of data that can provide a more granular picture. These include multiple surveys, the quarterly survey of unincorporated enterprises and the RBI’s surveys on household conditions in urban and rural areas.

The RBI’s survey on industrial enterprises is also important. Its industrial outlook survey indicates pressure on profitability and a significant rise in raw-material costs.

These surveys can therefore help assess what is actually happening on the ground rather than relying entirely on headline GDP and GVA numbers.

Is the divergence between headline GVA and other indicators a technical issue or something more fundamental?

GDP and GVA estimates for FY23, FY24, FY25 and FY26 were scaled down when the statistical base was changed from 2012–13 to the current base. On average, nominal GDP was scaled down by roughly ₹10 lakh crore, while the annual downscaling through FY26 was around 3.5%.

The concern is that the current 11.5% GVA growth and 10.3% nominal GDP growth rely heavily on high-frequency formal-sector data. This can create an upside bias in the estimates.

Therefore, these GDP numbers need to be considered with caution.

What is the broader implication for households, companies, governments and the RBI?

There is a lack of reliable indicators for economic decision-making because GVA and GDP numbers are used by households, corporates, governments and the RBI.

The solution is not to equate GST with GVA or GDP, because these indicators are not directly comparable. Rather, the objective should be to examine multiple data sets together.

GST, corporate results, manufacturing data, the quarterly survey of unincorporated enterprises, RBI household surveys and the RBI’s industrial outlook survey can collectively provide a more detailed picture.

GDP data makes a useful headline, but economic agents increasingly need multiple indicators to understand the underlying health of the economy and make informed decisions.