- The provisional figure, released by the Ministry of Statistics and Programme Implementation (MoSPI), states that the Indian economy grew by 4.2% in 2019-20.
- This is the lowest annual growth rate of GDP registered under the new GDP data series which uses 2011-12 as the base year.
More on the news:
- The data pertains to the the fourth quarter (January to March) of the last financial year (2019-20) as well as the provisional estimates of the full-year GDP growth rate.
- The provisional figure, which is likely to be revised again by January next year when MoSPI releases the First Revised Estimates for FY20.
A cause of worry:
- A sharp decline in the real GDP: From the 8.5% growth that the government expected in the Union Budget 2019-20.
- This is also significantly lower than the 5% that the Second Advance Estimates suggested at the end of February earlier this year.
- Nominal GDP plummets: A similar fall can be seen in the trajectory of the nominal GDP (Real GDP is arrived at by subtracting the nominal GDP growth by the inflation level).
- At the time of the 2019-20 Budget presentation, nominal GDP was expected to grow by 12%-12.5%. By the end of it, provisional estimates peg it at just 7.2%.
- This sharp deceleration in nominal GDP growth, shows the continued weakening of India’s growth momentum even before it was hit by the Covid-19 induced lockdown.
- Fall in private investments: Despite once-in-a-generation reform, private investments actually fell by almost 3% in 2019-20 - in sharp contrast to the 9% increase in 2018-19.
- The provisional estimates specifically bring out this weakness as they included significant downward revisions on quarterly GDP estimates.
- The manufacturing sector contracted further, recording a negative growth of 1.4%.
A ray of hope: Agriculture and mining sectors picked up in the fourth quarter, growing at rates of 5.9% and 5.2% respectively. Also, Public administration, defence and other services grew at 10.1%.
Key takeaways from provisional GDP estimates
Why does the sharp deceleration in the nominal GDP matters?
- Nominal GDP growth rate base of all fiscal calculations:
- The government bases its calculations - say the amount revenues it will raise and the amount of money it will be able to spend - on this initial assumption.
- A sharp divergence in nominal GDP growth rate basically upsets all other calculations in the economy.
- For instance, a sharp fall means the government does not get the revenues it had hoped for and it can’t spend as much as it wanted to.
- Reflects poorly on the government’s fiscal marksmanship:
- In other words, it shows that the government was not able to assess the magnitude of economic growth deceleration that was underway.
- Poor fiscal marksmanship, in turn, leads to inaccurate policy making because a government could end up making policies for an economy that doesn’t actually exist on the ground.
- For instance, an economy slowing down sharply on account of a decline in demand, even a massive corporate tax cut would be ineffective.
Frequent and significant revisions in quarterly GDP:
- Criticism of the new GDP data series: Using 2011-12 as the base year. According to Arvind Subramanian(former Chief Economic Advisor to India’s Finance Ministry), the new series overestimated India’s GDP by as much as 2.5 percentage points.
- Too much fluctuation in the provisional estimates: Shown in Table below
A warped economic structure:
Another key takeaway from the provisional GDP estimates is the undesirable emerging structure of the Indian economy.
- Missing Second tier(Manufacturing Sector)
- For India to grow and create jobs for the millions that enter its workforce each year, manufacturing growth has to rise.
- Together with services, manufacturing growth was supposed to absorb the millions still dependent on agriculture.
- If India was to create lots of well-paying jobs that allow it to reap the so-called demographic dividend then it had to be via manufacturing growth.
- 2019: A dismal picture: While the agriculture and allied sectors enjoyed buoyant growth, as the year progressed, manufacturing simply lost its way.
Demand has fallen, FD increased:
- The most disturbing news is that the three components of demand have fallen - consumption demand has slowed, while investments and exports are both in negative territory.
- The Controller General of Accounts data showed that the Centre’s gross tax revenues fell an unprecedented 3.4% in 2019-20, while fiscal deficit increased to 4.6% of GDP, well above the revised estimate of 3.8%.
Given the trend of repeated downward revisions, it is likely that even these provisional estimates may turn out to be optimistic.
Change of Base Year for GDP calculation
What is a Base Year?
- It enables inter-year comparisons and gives an idea about changes in purchasing power and allows calculation of inflation-adjusted growth estimates. The last series has changed the base to 2011-12 from 2004-05.
- The MOSPI is considering changing the base year for GDP calculation from 2011-12 to 2017-18.
GDP calculation in India:
- Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
- As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
- GDP = Private Consumption + Gross Investment + Government Investment + Government Spending + (Exports-Imports)
- In 2015, the Central Statistics Office (CSO) adopted the international practice of GDP at market price (and did away with GDP at factor cost) and the Gross Value Addition (GVA) measure to better estimate economic activity.
- GDP at Market Price = GDP at Factor Cost + Indirect Taxes – Subsidies