GS Paper: GS3

Context

India’s GDP data for Q1 of 2021-22 was released on August 31, 2021. The data revealed the real GDP growth at 20.1% in Q1.

Making sense of the growth

• Base effect: Real GDP growth at 20.1% in Q1 of 2021-22 is largely because of the contraction of 24.4% in the corresponding quarter of the first COVID-19 year, that is, 2020-21.
• The Q1 2021-22 output and GDP growth data reflect a strong base effect since the corresponding levels of Q1 of 2020-21 were significantly adversely impacted by the first wave of COVID-19.
• Fall in magnitude: The magnitude of real GDP fell short of the corresponding level in 2019-20 by a margin of ₹3.3 lakh crore.
• Required rate: A growth rate of 32.3% was required in Q1 of 2021-22 for achieving the same level of real GDP as in Q1 of 2019-20.
• To achieve the annual growth of 9.5% as forecast by both the Reserve Bank of India and the International Monetary Fund for 2021-21, an average growth of 6.8% in the remaining part of the year would be required.
•  The task would become relatively more demanding in Q3 and Q4 considering that the real GDP growth was positive at 0.5% and 1.6%, respectively, in the corresponding quarters of 2020-21.

Analysing the demand side

1) Private consumption growth lagging overall GDP growth

• Largest segment: The largest segment of GDP viewed from the demand side is private final consumption expenditure (PFCE).
• Its average share over the last three years (2018-19 to 2020-21) was 56.5%.
• If PFCE were to reach back the 2019-20 level, it should have grown by 35.5% in this quarter.
• The recovery in private consumption demand is lagging behind the overall GDP growth.
• Way forward: Private consumption depends largely on income growth and its distribution.
• Therefore, it would be useful to focus on further supporting income and employment levels for the MSMEs and informal sectors of the economy which have a higher propensity to consume.

2) Export and investment: positive outcome in Q1

• Noticeable positive outcomes in Q1 of 2021-22 came from exports and to some extent, from investment as reflected by gross fixed capital formation (GFCF).
• Exports grew by 39.1% over a contraction of 21.8% in Q1 of 2020-21.
• This differential is reflected in a positive growth of 8.7%.
• Investment: In the case of GFCF, the base effect was quite large.
• Despite a growth of 55.3% in Q1 of 2021-22, its magnitude was still 17.1% lower than the corresponding level in Q1 of 2019-20.

3) Contraction in government final consumption

• The only demand segment which contracted even with reference to Q1 of 2020-21 was government final consumption expenditure (GFCE).
• This contraction was by a margin of (-) 4.8%.

Analysing the output side

1) Key service sectors

• The key service sector — namely trade, transport, storage grew by 34.3% in Q1 of 2021-22 as compared to a contraction of 48.1% in Q1 of 2020-21.
• However, relative to its level in Q1 of 2019-20, the output of this large service sector was significantly lower by 30.2% in Q1 of 2021-22.
• Though public administration, defence and other services showed a growth of 5.8% in Q1 of 2021-22 over Q1 of 2020-21, they actually reflected a contraction of 5.0% as compared to Q1 of 2019-20.

2) Agriculture

• The key positive news came from the agricultural sector which showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.
• Given agriculture’s positive growth in all the quarters of 2020-21, further contribution from this sector to the overall growth may not be expected.
• Its average weight to the overall output is also low at about 15%.
•  It is the high weight manufacturing sector and the two substantive service sectors — trade, transport et. al and financial, real estate et al. — which will have to support growth in the remaining part of the year.

Way forward

• Government should raise the demand: The Centre’s fiscal deficit in the first four months of 2021-22 amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.
• Clearly, significant policy space is opening up for the government to raise its demand and its contribution to output in the remaining part of the current fiscal year.
• Dealing with likely third wave: Attempts should be made either to bypass or at least curb the adverse impact of COVID-19’s likely third wave.
• Vaccination and investment in health infra:  Both the coverage of vaccination and the pace of investment in health infrastructure should be accelerated.
• As revenues improve, expenditures can be increased.
• There is no need to reduce the fiscal deficit below the budgeted level of 6.8% of GDP.

Consider the question “To make up for the loss of output in the last two years India needs to embark on the path of high growth trajectory. Suggest the measure to achieve this objective.”

Conclusion

We need a faster rate of growth to make up for the loss of output in the previous two years from the trend rate. We must lay the foundation for faster growth in this year itself.

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The much-anticipated estimates of gross domestic product (GDP) for the first quarter of the fiscal year 2021-22 were released on 31 August. This has seen an unprecedented decline in GDP at 24.4%.

Why debate this?

• An increasing GDP is often seen as a measure of welfare and economic success.
• However, it fails to account for the multi-dimensional nature of development or the inherent short-comings of capitalism, which tends to concentrate income and, thus, power.
• The real issue thriving the Indian Economy is the relevance of GDP estimates as the sole or most important indicator of a recovery.
• Our economy was slowing down even before the pandemic and was then devastated by it.

GDP as an indicator

• Economic growth assesses the expansion of a country’s economy.
• Today, it is most popularly measured by policymakers and academics alike by increasing gross domestic product or GDP.
• This indicator estimates the value-added in a country which is the total value of all goods and services produced in a country minus the value of the goods and services needed to produce them.
• It is common to divide this indicator by a country’s population to better gauge how productive and developed an economy is – the GDP per capita.

A brief history of Growth and GDP

• The concept of economic growth gained popularity during the industrial revolution, when market economies flourished.
• In the 1930s, Nobel laureate, Simon Kuznets wrote extensively about national statistics and propagated the use of GDP as the measure of the national income of the US.
• Against the backdrop of a bloody world wars, governments were on the look for analytical tools to raise taxes to finance the newly minted war machine.
• It was at the 1944 Bretton Woods conference that GDP became the standard tool for measuring a country’s economy.
• Right from the classicals to the neo-classicals, the idea of development was intertwined with economic growth, i.e. accumulation of wealth and production of goods and services.

Prominence of GDP today

• GDP as a measure of economic growth is popular because it is easier to quantify the production of goods and services than a multi-dimensional index can measure other welfare achievements.
• Precisely because of this, GDP is not, on its own, an adequate gauge of a country’s development.
• Development is a multi-dimensional concept, which includes not only an economic dimension, but also involves social, environmental, and emotional dimensions.

Limitations of GDP

• One of the limitations of GDP is that it only addresses average income, failing to reflect how most people actually live or who benefits from economic growth.
• There is also a possibility that the wealth of a society becomes more concentrated and why this is counterproductive to development.
• If left unchecked, growing inequalities can not only slow down growth, but also generate instability and disorder in society.

Therefore, a growing GDP cannot be assumed to necessarily lead to sustainable development.

Relevance since COVID times

(a) Failure to capture informal economy

• A decline in economic activity, as captured by GDP data, is only one part of the distress caused by the slowdown and covid.
• GDP estimates hardly capture the extent of depressed economic activity in the informal sector.
• This makes it irrelevant to the cause of understanding the changing fortunes of workers and others who are dependent on these activities.
• India’s informal sector is not only a significant part of the overall economy but is crucial for generating broad demand, given the significantly large proportion of our population that depends on it.

(b) Rise in distress employment

• Most worrisome is a reversal of the trend of non-farm diversification due to reverse migration.
• After more than five decades, we have seen an actual increase in the proportion of workers employed in agriculture.

(c) Farmers losses

• Farmers have fared badly. Already suffering from low output prices, the majority of farmers have seen incomes decline as input costs rose (such as on diesel and fertilizers).
• Even though our farm sector appears relatively unaffected by covid, the ground reality of farmer incomes is at complete variance with the aggregate statistics from the national accounts.
• The failure to capture livelihood and income losses in the informal sector is only one aspect of our GDP data inadequacy.

GDP can never account this

• This failure to reflect the economic conditions of our population’s majority is partly a result of the way data on GDP is calculated, but also due to infirmities of the database itself.
• But its limitations at the conceptual level are far more serious.

Alternate measures

• One expanded indicator, which attempts to measure the multi-dimensional aspect of development, is the Human Development Index (HDI) by UNDP.
• It incorporates the traditional approach to measuring economic growth, as well as education and health, which are crucial variables in determining how developed a society is.
• In 2018, the World Bank launched the Human Capital Index (HCI).
• This index ranks countries’ performances on a set of four health and education indicators according to an estimate of the economic productivity lost due to poor social outcomes.

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