From UPSC perspective, the following things are important :
Prelims level : GDP computation and various terminologies
Mains level : National Income Accounting
The Ministry of Statistics and Programme Implementation (MoSPI) has released the First Advance Estimates (FAE) for the current financial year (2021-22 or FY22).
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What is GDP?
- GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).
- It is slightly different from the other commonly used statistic for national income — the GNP.
- The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.
GDP estimates for FY22
- According to MoSPI, India’s GDP will grow by 9.2 per cent in 2020-21.
- Last financial year, FY21, the GDP had contracted by 7.3%.
What are the First Advance Estimates of GDP?
- The FAE, which were first introduced in 2016-17, are typically published at the end of the first week of January.
- They are the “first” official estimates of how GDP is expected to grow in that financial year.
- But they are also the “advance” estimates because they are published long before the financial year (April to March) is over.
- It is important to note that even though the FAE are published soon after the end of the third quarter (October, November, December), they do not include the formal Q3 GDP data.
- Q3 data is published at the end of February as part of the Second Advance Estimates (SAE).
Significance of FAE
- Budgetary calculations: Since the SAE will be published next month, the main significance of FAE lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s budget allocations.
- Basis for nominal GDP: From the Budget-making perspective, it is important to note what has happened to nominal GDP — both absolute level and its growth rate. That’s because nominal GDP is the actual observed variable.
Note: Real GDP, which is the GDP after taking away the effect of inflation, is a derived metric. All Budget calculations start with the nominal GDP.
Real GDP = Nominal GDP — Inflation Rate
The difference between the real and nominal GDP shows the levels of inflation in the year.
How are the FAE arrived at before the end of the concerned financial year?
Ans. Benchmark-Indicator method
- The FAE are derived by extrapolating (uses ratio and proportion) the available data.
- The approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
- In this, the estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.”
What are the main takeaways?
#1 GDP Growth
- At 9.2%, the real GDP growth rate for FY22 is slightly lower than most expectations, including RBI’s, which pegged it at 9.5%.
- These estimates are based on data before the rise of the Omicron variant.
#2 Role of high inflation
- For FY22, while real GDP (with 2011-12 base prices) will grow by 9.2%, nominal GDP (calculated using current market prices) will grow by a whopping 17.6%.
- The difference between the two growth rates — about 8.5 percentage points — is essentially a marker of inflation (or the rate at which average prices have increased in this financial year).
#3 Private consumption continues to struggle
- The FAE analyses the three main contributors to GDP — private consumption demand, investments in the economy, and government expenditures.
- It shows that while the latter two are expected to claw back to the pre-Covid level, the first engine will continue to stay in a slump.
#4 Average Indian is much worse off
- For the bulk of the Indian population, thus, aggregate data recovering to pre-Covid levels are largely academic.
- An average Indian has lost almost 2 years in terms of income levels and 3 years in terms of spending levels.
Try this PYQ:
Q. In the context of Indian economy, consider the following statements:
- The growth rate of GDP has steadily increased in the last five years.
- The growth rate in per capita income has steadily increased in the last five years.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Note: There can be no absolute answers to such questions unless the year is mentioned. Still try to substantiate your answer with the FY21 context.
Do post it here.