Provisional GDP Estimates - Deceleration

Why in news?

The Ministry of Statistics and Programme Implementation (MoSPI) has released the data for -

What is the GDP growth projection?

The data report 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 with base year 2011-12.
In contrast, the government had expected in July 2019 when it presented the Budget for that year a growth of 8.5%.
It is also significantly lower than the 5% that the Second Advance Estimates suggested at the end of February 2020.

What is the nominal GDP scenario?

The above is the growth rate in real GDP.
A similar fall can be seen in the trajectory of the nominal GDP as well.
[Real GDP is arrived at by subtracting the nominal GDP growth by the inflation level.]
At the time of the 2019-20 Budget presentation in July 2019, nominal GDP was expected to grow by 12%-12.5%.
The provisional estimates peg it at just 7.2%. [In 2018-19, the nominal GDP grew by 11%.]
The sharp deceleration in nominal GDP growth, more than anything else, shows the continued weakening of India’s growth momentum.
This was the case even before the economy was hit by the Covid-19 induced lockdown.

Why is this a big concern?

First of all, the nominal GDP growth rate is the base of all fiscal calculations in the country.
The government bases its calculations on this initial assumption.
E.g. the amount of revenues the government will raise and the amount of money it will be able to spend
A sharp fall in nominal GDP growth rate means the government does not get the revenues it had hoped for and, it cannot spend as much as it wanted to.
Secondly, the substantial deceleration in nominal GDP growth reflects poorly on the government’s fiscal prudence.
In other words, it shows that the government was not able to assess the magnitude of economic growth deceleration that was underway.
Government's poor fiscal marksmanship, in turn, leads to inaccurate policy making.
This is because a government could end up making policies for an economy that does not actually exist on the ground.
E.g. in an economy that was slowing down sharply and that too on account of a demand decline, even a massive corporate tax cut would be ineffective
Certainly, despite this once-in-a-generation reform (tax cut), private investments actually fell by almost 3% in 2019-20.
This remains in sharp contrast to the 9% increase in 2018-19.

What is the concern with frequent revisions in quarterly GDP?

India’s national income accounting data (the new GDP data series with base year 2011-12) has been under criticism in the past.
Arvind Subramanian (2014-2018 Chief Economic Advisor to Finance Ministry) argued, in 2019, that the new series overestimated India’s GDP by as much as 2.5 percentage points.
While that debate remains unsettled, the credibility of India’s GDP estimates is weakened by frequent and significant revisions.
The provisional estimates have fluctuated repeatedly.
E.g. the growth estimate for Q2 (July, August and September) has gone from 4.5% to 5.1% and back to 4.4% in just 5 months (between January and May 2020)
In essence, it is now becoming clear that all through 2019-20 India’s growth rate was decelerating much faster than what was officially accepted at that time.

What is the larger concern?

Another key takeaway from the provisional GDP estimates is the undesirable emerging structure of the Indian economy.
It has been widely argued, that 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.
[Agriculture, even when it grows fast, does not have the ability to raise per capita income in a big way.]
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.
But 2019 figures in manufacturing are less encouraging.
While the agriculture and allied sectors enjoyed buoyant growth, as the year progressed, manufacturing simply lost its way.
The growth in this sector contracted for three of the four quarters of the year.

What does all this mean?

The estimates for 2019-20 just support the notion that the growth deceleration since 2016-17 simply became worse as the last financial year progressed.
In the last quarter of the financial year, the economy grew by just 3.1%.
It shows that the economy had already become quite vulnerable before Covid-19 hit India at the end of March 2020.
Prospective intervention is essential to alter the course.

Source: Indian Express