Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India is not the fastest growing big economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GDP and inflation

Mains level : Paper 3- India's growth rate

Context

The Provisional Estimates of Annual National Income in 2021-22 just released show that GDP grew 8.7% in real terms and 19.5% in nominal terms (including inflation). It makes India the fastest growing major economy in the world.

What data implies

  • Just 1.51% larger: Provisional Estimates of Annual National Income in 2021-22 also indicate that, the real economy is 1.51% larger than it was in 2019-20, just before the novel coronavirus pandemic hit the world.
  • In nominal terms it is higher by 17.9%.
  • Inflation: These numbers imply that the rate of inflation was 10.8% in 2021-22 and 16.4% between the two years, 2019-20 and 2021-22.
  • Almost no growth: This picture implies almost no growth and high inflation since the pre-pandemic year.
  • So, the tag of the fastest growing economy means little.
  • Quarterly growth rate: The quarter to quarter growth currently may give some indication of the present rate of growth.
  • In 2020-21, the quarterly rate of growth increased through the year.
  • In 2021-22, the rate of growth has been slowing down.
  • Of course in 2020-21, the COVID-19 lockdown had a severe impact in Q1 (-23.8%); after that the rate of growth picked up.
  • In 2021-22, the rate of growth in Q1 had to sharply rise (20.3%).
  • Ignoring the outliers in Q1, growth rates in 2021-22 have sequentially petered out in subsequent quarters: 8.4%, 5.4% and 4.1%.
  • Going forward, while the lockdown in China is over, the war-related impact is likely to persist since there is no end in sight.
  • Thus, price rise and impact on production are likely to persist.

Issues with the data

  • The issue is about correctness of data.
  • The annual estimates given now are provisional since complete data are not available for 2021-22.
  • There is a greater problem with quarterly estimates since very limited data are available for estimating it.
  • No data for Q1 of 2020-21: The first issue is that during 2020-21, due to the pandemic, full data could not be collected for Q1.
  • No data for agriculture: Further, for agriculture, quarterly data assumes that the targets are achieved.
  • Agriculture is a part of the unorganised sector.
  • Very little data are available for it but for agriculture — neither for the quarter nor for the year.
  • It is simply assumed that the limited data available for the organised sector can be used to act as a proxy.
  • The non-agriculture unorganised sector is represented by the organised sector.
  • Changes in non-agriculture unorganised: The method using the organised sector to proxy the unorganised non-agriculture sector may have been acceptable before demonetisation (2016) but is not correct since then.
  • The reason is that the unorganised non-agriculture sector suffered far more than the organised sector and more so during the waves of the pandemic.
  • Shift in demand to the organised sector: Large parts of the unorganised non-agriculture sector have experienced a shift in demand to the organised sector since they produce similar things.
  • This introduces large errors in GDP estimates since official agencies do not estimate this shift.
  • All that is known is that the Micro, Small and Medium Enterprises (MSME) sector has faced closures and failures.
  • If GDP data are incorrect, data on its components — private consumption and investment — must also be incorrect.
  • Further, the ratios themselves would have been impacted by the shock of the lockdown and the decline of the unorganised sectors.
  • Private consumption data is suspect since according to the data given by the Reserve Bank of India which largely captures the organised sector, consumer confidence throughout 2021-22 was way below its pre-pandemic level of 104 achieved in January 2020.
  • In brief, neither the total nor the ratios are correct.

Possible corrections

  • In the best possible scenario,  assume that the organised sector (55% of GDP) and agriculture (14% of GDP) are growing at the official rate of growth of 8.2% and 3%, respectively.
  • Then, they would contribute 4.93% to GDP growth.
  • The non-agriculture unorganised component is declining for two reasons: first, the closure of units and the second the shift in demand to the organised sector.
  • Even if 5% of the units have closed down this year and 5% of the demand has shifted to the organised sector, the unorganised sector would have declined by about 10%; the contribution of this component to GDP growth would be -3.1%.

Conclusion

Clearly, recovery is incomplete and India is not the fastest growing big economy of the world.

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