Table of Contents
Overlook
The National Statistical Office releases quarterly GDP data in every quarter of the financial year and the latest data is out with 20.1% growth in Q1 GDP in FY 2021-22. While one interpretation of this data could be a highly optimistic view that this is a great output and the Indian economy is back on track having defeated the coronavirus pandemic, the other view could be that this growth figure can be deceptive as high growth figure is due to low-base effect.
Before going into this political argument of whether this is a V-shaped recovery or a drag on 24.4% decline in Q1 of last year seeing that truth lies somewhere in between and can be determined with a closer reading of data.
What does Data say?
India is the fastest-growing economy in the world but in comparison to the fastest declining with the corresponding quarter of the last year is not much of an improvement. In year on year comparisons of absolute terms, the total output of the Indian economy in Q1 FY 21-22 is merely 1% more than the total output created by the economy in the same months of last year.
Low Base Effect
Last year in the months of April-June pandemic had overwhelmed the country with nationwide lockdowns and curbing of economic activity in a big way. The Indian economy took a heavy blow which shrunk by 24.4%. The current growth of 20.1% is on a low base of last year and thus even with this growth, it is substantially less than what the economy was already producing before the pandemic struck.
Estimating the real picture
For the sake of understanding, assume the output in June 2019 to be ₹100, had it increased approximately 7% as it had been for the last five years (mean growth in last 5 years preceding the pandemic) it would have been 114 in Q1 FY21, however, in the first quarter of last year it dipped 24% and that would amount to ₹76.
Then it increased by 20% in the first quarter of this fiscal year which would give us ₹91. As a result, even with 20% growth, the actual output is ₹9 less than that it was two years earlier in 2019. Therefore, the economists are calling the data a statistical illusion created on account of the “low base effect” when a small absolute change from a low initial amount is transferred into a large percentage change, yet it is a fantastic growth given the nationwide lockdown of last year.
Here, it must also be remembered that the second wave of the pandemic has its impact even in this quarter as several places went into localised lockdowns and curbs on numerous economic activities.
Closer Reading
While calculating the GDP, there are three main components, consumer spending, government expenditure and net export. To begin with, the consumer spendings, that is private final consumption(PFC) which is the largest contributor in the Indian context, has been down to almost the same level as in the year 2017-18, which is a big concern as the businesses will be reluctant to invest unless the demand grows in the private sector.
The second component is the Gross Fixed Capital Formation(GFCF), it is the second biggest contributor, which depends on the private sector which produces goods and services. It has also seen a dip to the level of 2018-19. However, it was predictable because the nationwide lockdown left the market uncertain, consequently, investments showed a decline. The government’s strategy has been to stimulate private sector investments to boost the growth of the country’s economy. The government has provided existing business owners and entrepreneurs with incentives and reductions in tax. However, it is unlikely to pay off unless the private consumption demand rises.
The Government Final Consumption Expenditure(GFCE) is around11% of the GDP. GFCE is down to 4.8% compared to last year which could cause a ripple effect on the growth in the coming years, the government is expected to adopt a “counter-cyclical” fiscal policy that would require it to spend more than usual. Finally, the net export, India imports more than it exports which has a negative effect on GDP, however, this year India has seen a heavy rise in exports.
Another thing to look at is GVA data, Gross Value Added is an economic productivity metric that reveals value added in a fiscal year. It helps in determining sector by sector, as which industry is thriving and which is failing.
The two industries that have gone almost unaffected are agriculture and electricity. The agriculture industry has been doing better and better. According to the CMI, the employment rate in the agriculture sector is much better this year than industrial and informal labour. The GVA for Trade, Hotel, Transportation, Communication & Broadcasting Services and Construction has been lower than it was in 2017-18 which reflects on GFCF. These two industries have been providing a large portion of employment and their current state reflects on the loss of jobs and livelihood and high unemployment rates.
The growth of 20% is negated by the previous quarter dip of 24%, to make up for the loss the GDP should have grown much more than it has. However, to look at absolute GDP figures, in the year 2014-15 the economy was ₹105 trillion, ₹131 trillion in 2017-18 and ₹135 trillion in 2021-22. India is back to the level of 2017-18 and should be hopeful that India’s economy lands somewhere around as it was in the fiscal year 2018-19 by the end of FY 21-22
Going ahead!
For the government, the road ahead is supposed to be full of challenges. The dream of becoming a $5 trillion economy by 2025 was ambitious even without the pandemic, now it is not going to happen. In every crisis, the Indian economy has proved itself to be working on strong fundamentals, the government needs to further strengthen these fundamentals. A prudent monetary policy, prudent fiscal spending in infrastructure and capacity building, research and development and ensuring welfare by means of direct transfers, safety nets and other welfare schemes shall put India’s economy back on track!
