GDP 2nd Advance Estimates: what’s changed since 1st, what it means

What is the highlight in the SAE?

If the concern was whether India’s economic recovery in FY22 — after the slump in FY21 due to Covid-19 — is good enough for overall GDP to scale back the pre-Covid level (that is, FY20) then the SAEs do not provide any new picture. However, the SAEs present a completely different picture of the nature of India’s economic recovery from the one presented by the FAEs.

How are the two pictures different?

Before going into that, it is necessary to understand that India’s overall GDP has three main engines of growth. The biggest is Private Final Consumption Expenditure (PFCE), the money that everyone spends in their personal capacity, and accounts for over 55% of GDP. The second biggest is the money spent by private firms (and, to a small degree, the government) towards increasing productive capacity. This is investment expenditure. Shown as Gross Fixed Capital Formation (GFCF), it accounts for around 33% of GDP. Then comes the money spent by governments towards their consumption (as against their investments). This is the Government Final Consumption Expenditure (GFCE).

Based on FAEs, the key observations about the nature of India’s recovery were:

– Overall GDP was expected to go past the pre-Covid level.

– Recovery was driven by higher investments — as evidenced by the spike in GFCF.

– The main worry was poor levels of PFCE, which was well below the pre-Covid levels — an effect of the ‘K-shaped’ recovery. The same held true for per capita personal expenditure as well as per capita GDP (or income).

The argument was: Yes, overall GDP is likely to be back at pre-Covid levels, but private income and expenditures are far below pre-Covid levels. This will imply weak consumer demand, and, before long, rob businesses of the incentive to continue investing.

But the altered distribution of the sub-components has changed the evolving story. Even though overall GDP and per capita GDP (read income) have not changed much, PFCE and per capita PFCE (read expenditure) have jumped. GFCE and GFCF show a commensurate decline in SAEs (over FAEs).

Overall, all components are above the pre-Covid level and they are being led by private demand, which augurs well for the future.

How did so much change in a month?

Pronab Sen, former Chief Statistician of India, pointed to the inadequacy of data while making the FAEs. “You must understand that there are no independent estimates on the expenditure side,” he said, pointing to the fact that what MoSPI collects is data on Gross Value Added — or the production side of the economy. The GDP estimates are arrived at by adding up the expenditures.

“So what MoSPI does is that it takes the production side data and they classify goods and services as either ‘consumption’ goods or ‘investment’ goods,” he said.

Is that the final picture?

No, said Sen. “During times of such upheavals, revisions are extremely important. We are still working with incomplete information. For instance, the Ministry of Corporate Affairs’ data will become available only in the Second Revised Estimates (Jan-end, 2024). As things stand, if one looks at this GDP data with other estimates such as those of unemployment, one could argue that the upper arm of the ‘K’ has done better than what was previously imagined”.

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