The Central Statistics Office (CSO) on Friday released the economic growth data for the first quarter (Q1, or April to June) of the current financial year (2019-20, or FY20). A disappointing number was widely expected, especially after the 5.8% growth in Q4 of FY19, and the wave of bad news such as falling sales of automobiles and everyday consumables — even so, the official GDP data of just 5% came as a shock to many.
Real vs Nominal Growth
At 5%, the real GDP growth rate has hit a six-year low (see Chart 1). Real GDP growth rate is a derived figure — it is arrived at by subtracting the inflation rate from the nominal GDP growth rate, that is growth rate calculated at current prices. What is more worrying is the deceleration in the nominal GDP growth, which has been pegged at 8% for Q1. For perspective, it should be noted that the Union Budget, presented on July 5, had expected a nominal growth of 12%. The idea was that with a 12% nominal growth and 4% inflation rate, real GDP would be 8%.
At 8% nominal growth, all calculations — real GDP and tax revenues etc. — go haywire. An 8% nominal growth is unusually low; just once has nominal growth fallen to this level in both the current GDP series (with a base year of 2011-12) and the past GDP series (with the base year of 2004-05). And that was in the wake of the global financial crisis in 2009.
GVA vs GDP
There are two main ways in which the CSO estimates economic growth. One is from the supply side — that is, by mapping the value-added (in rupee terms) by the various sectors in the economy. The sectors are broadly divided into Agriculture, Industry and Services, and all workers in the economy fall into one or the other category.
There are sub-categories too — Industry, for example, has Manufacturing, Construction, Mining & Quarrying, etc. When all the value-added is totalled, we get the Gross Value Added (GVA) in the economy. In other words, GVA tracks the income generated for all the workers in the economy.
The GDP is arrived at from the demand side. It is calculated by mapping the expenditure made by different categories of spenders. Broadly speaking, there are four sources of expenditure in an economy — namely, private consumption, government consumption, business investments, and net exports (exports minus imports). Because the GDP maps final expenditure, it includes both taxes and subsidies that the government receives and gives. This component, net taxes, is the difference between GVA and GDP.
Typically, GDP is a good measure when you want to compare India with another economy, while GVA is better to compare different sectors within the economy. GVA is more important when looking at quarterly growth data, because quarterly GDP is arrived at by apportioning the observed GVA data into different spender categories.
The supply-side story
The GVA in Q1 is pegged at 4.9%. Such a low level of GVA suggests that producers are not adding enough value — in other words, their income growth is low.
As Chart 2 shows, growth in all three sectors has declined, but most of the decline is in Agriculture and Industry. Within Industry, Manufacturing has seen a spectacular collapse. Other sub-sectors of Industry such as Mining & Quarrying and Construction too, have slumped over the past five quarters.
These two sectors — Agriculture and Industry — not only employ the largest number of people, but also have the maximum potential to create new jobs. Stagnant Agriculture and Industry imply that a bulk India’s poorest and less educated workforce is either not getting jobs, or not seeing their incomes grow. And they can’t shift to the better-paying Services sector because of the deficiency in skills.
The demand-side story
The GVA weakness shows up on the demand side (Chart 3). Private consumption, which accounts for over 55% of GDP, has grown by just 3.14%. The reason why private demand has collapsed is that the bulk of India’s labour force is not earning enough to spend more.
The other big GDP component — business investments (which accounts for 32% of GDP) — has grown by just 4.04%. Businesses are not investing because they are either in the process of deleveraging (getting rid of excess loans) or stuck with unsold inventories. The only spender that has grown better than expected is the government.
What the numbers imply
Firstly, the growth trajectory suggests there is more pain ahead. According to an analysis by State Bank of India, when GDP grew by 8% in Q1 of FY19, 70% of the leading indicators such as car sales showed acceleration. In this quarter, only 35% of these indicators showed acceleration, and GDP grew by 5%. For Q2 (July to September), only 24% indicators show acceleration.
Secondly, since the release, GDP growth rate forecasts for the current year have been dialled down yet again. Most observers expected a real GDP growth rate of somewhere between 5.4% and 6.4% for Q1. Now, SBI pegs the full-year growth at 6.1%, ICICI Securities at 6.3%, and Pronab Sen, former Chief Statistician, pegs it at 5.5%. Roughly six months ago, most estimates for FY20 were around 7.5%.
Thirdly, such weak growth implies that the government’s fiscal deficit figures are likely to be breached.
Lastly, since weak growth will lead to lower tax revenues, the government is likely to struggle if it wants to push up growth by spending on its own.