Context: India's growth in the first quarter of 2020-21 at (-) 23.9% showed one of the highest contractions globally. The 2020-21 real GDP growth for India is forecast in the range of (-) 5.8%  as per the Reserve Bank of India’s Survey of Professional Forecasters.

Contraction in nominal GDP

  • The average CPI inflation during the first five months of 2020-21 is estimated at 6.6%. 
  • Since deflator-based inflation tends to be lower than the CPI inflation, it may be about 5% or less. 
  • If we take the OECD’s real GDP growth projection at (-) 10.2% and a deflator-based inflation of about 5%, the implied contraction in nominal GDP is about (-) 5.0% for 2020-21.


  • Sharp fall in GDP: The challenge is to minimise this sharp contractionary momentum in real and nominal growth. 
  • No fiscal stimulus
    • The sector ‘Public Administration, Defence and other Services’ contracted at (-) 10.3%. 
    • States’ capital spending fell by 43.5%.
    • It is because of decline in revenue than increase in expenditure.
    • It appears that governments are withholding expenditure. That is not the right approach. 
  • Revenue erosion
    • The revenue calculations of the Budget were made on the assumption that the nominal income of the country would grow at 10%.
    • In the first quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6%.
    • The CAG-based data of 19 States show a contraction of (-) 45% in tax revenues. 
  • Limits to fiscal deficit
    • The economic situation warrants enhanced government expenditure. 
    • But there are not adequate resources to support a fiscal deficit of nearly 14% of GDP. 
    • Both monetisation and Open market Operations (OMOs) involve expansion of money supply which can potentially stoke inflation.
    • RBI has the mandate to maintain annual inflation at 4 per cent until March 31, 2021 with an upper tolerance of 6 per cent and a lower tolerance of 2 per cent.

Way forward:

  • Balancing with fiscal deficit

    • The government should  keep the combined fiscal deficit at around 14% of GDP in the current year. 
    • It will make up for the shortfall in tax and non-tax revenues plus 2.3% for the additionality over the budgeted expenditures in the already announced stimulus package.
    • This deficit will have to be brought down gradually over the years.
  • Indirect debt monetisation by RBI:
    • The fiscal deficit will have to be financed through borrowing (debt).
    • Generally, monetisation of debt means the central bank printing currency for the government to take care of any emergency spending and to bridge its fiscal deficit.
    • The Reserve Bank of India monetises, a part of the central government debt either directly or indirectly.
    • In both cases, the RBI is the provider of liquidity. 
    • But direct monetisation will increase inflation as it involves printing of currency.
    • Through its Open Market Operations (OMOs) which is indirect monetisation, the RBI has injected an extraordinary amount of liquidity. It will have to continue its OMOs.

Fiscal deficit 

  • It is the difference between the government’s total expenditure and its total receipts excluding borrowing 
  • Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts) 
  • Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
  • Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).

The GDP deflator

  • It  is also called implicit price deflator, and is a measure of inflation. 
  • It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.


  1. This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
  2. The deflator covers the entire range of goods and services produced in the economy compared to the limited commodity baskets for the wholesale or consumer price indices.
  3. It is seen as a more comprehensive measure of inflation.
  4. GDP deflator is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month.

Real vs nominal GDP

  • GDP price deflator measures the difference between real GDP and nominal GDP. 

  • Nominal GDP doesn’t include inflation, while the real GDP includes inflation.

  • Therefore nominal GDP is more often higher than real GDP in an expanding economy.
  • The formula to find the GDP price deflator:
    • GDP price deflator = (nominal GDP ÷ real GDP) x 100


  • A consumer price index (CPI) measures changes over time in the general level of prices of goods and services that households acquire for the purpose of consumption.
  • The wholesale price index basket has no representation of the services sector and all the constituents are only goods whose prices are captured at the wholesale/producer level.

Image Source: Indian Express

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Q) India's growth in the first quarter of 2020-21 at (-) 23.9% showed one of the highest contractions globally. The challenge is to minimise this sharp contractionary momentum in real and nominal growth. Critically analyse. (250 words)