GDP’s dirty little secret: why we should track GVA instead

GDP numbers are affected by changes in the goods and services tax rates and subsidy allocations, while Gross Value Added directly measures the value of output

Track GVA, not Tricky GDP

GDP growth rate is the headline number everyone tracks, to figure out how the economy is doing. It is time we shifted focus to the Gross Value added, or GVA, which is a more direct measure of the incomes generated in the economy. GDP numbers are affected by random decisions of the GST Council to raise tax rates or by the government’s decision 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 the Gross Value Added (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 for 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.

India is not accustomed to the chainsaw breed of fiscal conservatism that Elon Musk vocally championed, prior to his high-profile breakup with 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. 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. This is the conventional wisdom in Republican circles.

In India, too, many economists have tried to tie themselves to such a philosophy, more to caricature a growth model in which the government played a vital role as socialism that kills the animal spirits of capitalism, than to actually promote growth. Prime Minister Narendra Modi came to power as a slayer of Big Government and socialism. He once portrayed the Mahatma Gandhi National Rual Employment Guarantee Scheme as a monument to national failure. But, in the face of revealed distress in the economy, he has also assiduously funded the scheme, regardless of how this made the monument shine brighter. There is a big difference between the role the state and subsidies play in an economy like the US, and the role the state and subsidies play in an economy like India, whose per capita GDP is 3% of the US per capita GDP of $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.

While GDP is the headline number on everyone’s radar, what matters for creating jobs and incomes is the Gross Value Added, or 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, or gross domestic product, 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.

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 subsidized by the government, so the price is lower than the actual value – grain from the fair price shop, for example, or electricity in many states for certain classes of consumers.

So, to arrive at the gross value added in 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. Tax net of subsidy is 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 by both. You can lower Net Taxes by lowering tax collections or increasing the subsidy bill.

As can be seen from the table, when the GVA growth rate moved up from 6.7% in 2022-23 to 8.6% the following year, that is, by 1.9 percentage points, the GDP growth rate moved up 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.

202122 202223 202324 202425

net taxes Rs cr 1961815 2243775 2710068 3046113

GDP Rs Cr 23597399 26890473 30122956 33068145

GVA Rs Cr 21635584 24646698 26762344 30033033

GDP growth rate % 7 9.2 6.5

GVA growth rate % 6.7 8.6 6.4

Major Subsidies 446150 530958 412346 381375

Major Subsidies/GDP%1.9 2 1.37 1.16

Net tax/GDP% 8.3 8.3 9 9.2