Explained: Key takeaways from India’s GDP estimates


On Friday, the Ministry of Statistics and Program Implementation (MoSPI) released the first advance estimates (FAE) for the current fiscal year (2021-22 or FY22). According to the MoSPI, India’s Gross Domestic Product (GDP) – the total value of all final goods and services produced in the country in a fiscal year – will increase by 9.2% in 2020-2021. The last exercise, FY21, the GDP had contracted by 7.3%.

What are the first anticipated estimates of GDP?

FAEs, which were first introduced in 2016-17, are usually released at the end of the first week of January. These are the “first” official estimates of expected GDP growth this fiscal year. But they are also “early” estimates because they are published well before the end of the financial year (April to March).

It is important to note that although the EAFs are released shortly after the end of the third quarter (October, November, December), they do not include formal third quarter GDP data, which is released at the end of February as part of the Second Advance Estimate (SAE).

What is their significance?

Since the EAS will be released next month, the main importance of the EAFs is that they are the GDP estimates that the Union Ministry of Finance uses to decide on budget allocations for the next fiscal year.

From a budgeting perspective, it is important to note what happened to nominal GDP – both its absolute level and its rate of growth. This is because nominal GDP is the variable actually observed. Real GDP, which is the GDP after removing the effect of inflation, is a derived measure. All budget calculations begin with nominal GDP.

Real GDP = nominal GDP – inflation rate

However, from the perspective of ordinary people, it is the real GDP that matters. The difference between real and nominal GDP shows the inflation levels in the year.

How are AWFs established before the end of the financial year in question?

EAFs are derived by extrapolating the available data. According to the MoSPI, the approach for compiling the advance estimates is based on the benchmark method, i.e. “the estimates available for the previous year (2020-2021 in this case) are extrapolated using relevant indicators reflecting the performance of the sectors ”.

For example, for these AWFs, the MoSPI extrapolated sector estimates using indicators such as the Industrial Production Index (IIP) to October, inflation data – both retail and wholesale – until November, sales data of commercial vehicles until September. , etc., etc.

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How are the data extrapolated?

In the past, extrapolation for indicators such as PII was done by dividing the cumulative value of the first seven months of the current fiscal year by the average of the ratio of the cumulative value of the first seven months to the annual value of years previous ones.

So, if the annual value of a variable was twice the value of the first seven months of previous years, then for the current year as well, the annual value is assumed to be double that of the first seven months.

However, the pandemic has upended many of these projections due to significant fluctuations over the past two years. This is why the MoSPI warned that “these are early projections” which are subject to subsequent revisions depending on Covid, the impact on the economy and the government’s budgetary response.

What are the main takeaways?

# 1 Real GDP growth:

At 9.2%, the real GDP growth rate for FY22 is slightly lower than most expectations, including the RBI, which pegged it at 9.5%. In addition, these estimates are based on data prior to the rise of the Omicron variant. As such, it is possible that the final rate will be further revised downwards by the end of May when the “provisional” estimates for the entire year are published.

However, in times of such massive upheaval, it is always better to look at absolute levels rather than growth rates.

As it stands, aggregate GDP in FY22 is expected to exceed the pre-Covid level (see TABLE 1). This also applies to the absolute level of gross value added (GVA).

Table 1. (Source: MoSPI, RBI)

While GDP maps the economy to the expenditure (or demand) side, that is, by adding all expenditure together, the GVA provides a picture of the economy on the supply side. GVA maps the “added value” by different sectors of the economy such as agriculture, industry and services.

# 2 Role of high inflation

For fiscal year 22, while real GDP (i.e. GDP calculated using constant 2011-2012 prices) will increase by 9.2%, nominal GDP (i.e. – say GDP calculated using current market prices) will increase by 17.6%. The difference between the two growth rates – around 8.5 percentage points – is essentially a marker of inflation (or the rate at which average prices increased in this fiscal year).

# 3 Private consumption continues to suffer

Analysis of the top three contributors to GDP – private consumption demand, investment in the economy, and public spending – shows that while the latter two are expected to return to pre-Covid levels, the primary driver will continue to remain in a slump .

Private consumption expenditure generally accounts for over 55% of total GDP. As shown in TABLE 2, its level is expected to remain substantially at the 2019-2020 level. These low levels of private demand will make it difficult to sustain economic growth in the months and years to come.

Table 2. (Source: MoSPI, RBI)

# 4 The average Indian is much worse

While the aggregate figures of GDP and GVA may recover, the same cannot be said of an average Indian. Two data points prove it.

Table 3. (Source: MoSPI, RBI)

Table 3 maps GDP per capita (an approximation of average income) and private final consumption expenditure per capita (an approximation of average expenditure). At the end of March 2022, when the average income is estimated to be lower than the level of March 2020, the average expenditure will even be lower than the levels of March 2019, which marks the start of the second term of the BJP government.

In other words, an average Indian lost 2 years in terms of income levels and 3 years in terms of spending levels. Moreover, even these average numbers do not reflect the acute pain due to the growing inequalities in the country. Thus, for most of the Indian population, the aggregate data covering pre-Covid levels may be largely academic.


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