On Tuesday, the Ministry of Statistics and Programme Implementation (MoSPI) released the GDP data for the first quarter of the current financial year (2021-22).
Each year, the MoSPI releases four quarterly GDP data updates and these help observers assess the current health of the Indian economy.
What data do these updates contain?
Each such release provides data for two variables — one tracks the total demand in the economy and the other the total supply.
The first is GDP, which is the total monetary value of final goods and services — that is, those that are bought by the final user — produced in a country in a given period of time (in this case a quarter). In other words, it measures the value of total output in the economy by tracking the total demand.
The other is Gross Value Added or GVA. It looks at how much value was added (in money terms) in different productive sectors of the economy. As such, it tracks the total output in the economy by looking at the total supply.
On the face of it, the total output should be the same but every economy has a government, which imposes taxes and also provides subsidies.
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As such, GDP is “derived” by taking the GVA data and adding the taxes on different products and then subtracting all the subsidies on products. In other words,
GDP = (GVA) + (Taxes earned by the government) — (Subsidies provided by the government)
As explained, the difference between these two absolute values will provide a sense of the role the government played. As a thumb rule, if the government earned more from taxes than what it spent on subsidies, GDP will be higher than GVA. If, on the other hand, the government provided subsidies in excess of its tax revenues, the absolute level of GVA would be higher than the absolute level of GDP.
And what do the latest data show?
The data showed that in Q1 of 2021-22, India’s GDP grew by 20.1% while the GVA grew by 18.8%. These are year-on-year comparisons; in other words, the total output (as measured by GDP) of the Indian economy in the first three months of the current financial year (April, May and June) was 20.1% more than the total output created by the economy in the same months last year. The total output, as measured by GVA, grew by 18.1% YoY.
It is important to remember that GDP and GVA had contracted by 24.4% and 22.4%, respectively, in Q1 of the last financial year.
Does that mean India has registered a V-shaped recovery?
No. There is a difference between an economy benefiting from a “low base effect” and one registering a V-shaped recovery. A V-shaped recovery requires the absolute GDP of an economy getting back to the level before the crisis.
The total GDP and the total GVA are shown in the tables. India’s total output in Q1, whether measured through GDP or GVA, is nowhere near what it was in Q1 of 2019-20 (the year before the pandemic struck). In fact, both variables suggest India’s output levels are closer to 2017-18 levels. In other words, India produced the same amount of goods and services in Q1 this year as it produced in Q1 four years ago.
The lofty increases in GDP and GVA are in percentage terms, and while they look good and should not be scoffed at, they are for the most part a statistical illusion created by the very low base set by the complete nationwide lockdown in Q1 of last year.
It is for this reason that Aditi Nayar, Chief Economist, ICRA (a rating agency), states, “the sharp YoY expansion in Q1 FY2022 is analytically misleading with a sequential slowdown of 16.9% over Q4 FY2021 and a shortfall of 9.2% relative to the pre-Covid level of Q1 FY2020”.
Here’s another way to understand what is happening. Imagine that the GDP in Q1 of 2019-20 was Rs 100. Then it fell by 24% in Q1 of 2020-21 to be Rs 76. Then in Q1 of current financial year the GDP rose by 20% to become Rs 91. As such, even though the GDP has risen 20% in percentage terms, the actual output is Rs 9 lower than it was two years ago. Add to that the loss of two full years of growth that would have happened were it not for the pandemic.
If we compare quarter-on-quarter growth — Q1 FY22 to Q4 FY21 — then the GDP contracted by almost 17%.
It is for these reasons that in times of massive crises, it is always better to look at the absolute levels of output to correcting assess the state of an economy’s health. Percentage changes work well in normal times.
What do the sub-components of GDP tell us about the state of the economy?
The GDP data show what is happening to the four engines of economic growth in any economy. In India’s context, the biggest engine is consumption (C) demand from private individuals. This demand typically accounts for 56% of all GDP; technically called “Private Final Consumption Expenditure” or PFCE. The second-biggest engine is the investment (I) demand generated by private sector businesses. This accounts for 32% of all GDP in India; technically called Gross Fixed Capital Formation or GFCF. The third engine is the demand for goods and services generated by the government (G). This demand accounts for 11% of India’s GDP, and is called “Government Final Consumption Expenditure (GFCE)”. The fourth engine is the demand created by “Net Exports” (NX). This is arrived at by subtracting the demand Indians have for foreign goods (that is, India’s imports) from the demand that foreigners have for Indian goods and services (that is, India’s exports). Since India typically imports more than it exports, it is the smallest engine of GDP growth; it is often negative.
So, GDP = C + I + G + NX
As the Table on GDP data shows, private demand, the biggest engine of growth, in Q1 of the current year was down to almost exactly the level where it was in 2017-18.
This is the most important variable and the most worrisome one as well. That’s because unless demand from private individuals increases, business will not be enthused to invest more. It is no surprise to find that the second biggest engine — investments or GFCF — is languishing at 2018-19 levels.
The government’s strategy has been to revive growth by stimulating private sector investments. To this end, the government has given tax breaks and other incentives to existing companies owners and new entrepreneurs. But unless private consumption demand rises, this strategy is unlikely to bear fruit.
It is also noteworthy that government expenditures (GFCE) have actually fallen below last year’s levels. This could be a drag on future growth. At a time when all other sectors are struggling to create demand, the government is expected to resort to what is called a “counter-cyclical” fiscal policy and spend more than usual.
What do the GVA data say about the economy?
They tell us which specific sectors are doing well and which are struggling to add value.
The first check is whether the GVA of a sector in Q1 was more than in 2019-20. As things stand, only two sectors — Agriculture etc. and Electricity and other utilities — have managed to grow more than they did in 2019-20.
But the most worrisome bit is that the GVA of ‘Trade, Hotels, Transport, Communication & Services related to Broadcasting’ and ‘Construction’ is less than what it was even in 2017-18. These are two sectors that created lots of jobs for both unskilled and skilled workers in the past, and their weakness implies weak higher unemployment levels. The former in particular is the sector that has most of the contact services. From a policy perspective, a recovery here requires fuller levels of vaccination and improved public confidence.