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Saturday, September 25, 2021

ExplainSpeaking: 5 things to watch out for in the upcoming Q1 GDP data

What to look for in the Q1 GDP data, how to read it so that just by looking at the press release you can understand the true state of the economy

Written by Udit Misra , Edited by Explained Desk | New Delhi |
Updated: August 31, 2021 8:22:15 am
A labourer working at Barapullah Flyover, takes a water break, at the construction site, in New Delhi (Express Photo/Abhinav Saha)

Dear Readers,

Later this week, on August 31 around 5.30 pm, the Ministry of Statistics and Programme Implementation (MoSPI) will release the GDP (gross domestic product) data for the first quarter (April, May and June) of the current financial year (2021-22).

The MoSPI releases 4 quarterly GDP data updates and these help observers assess the current health of the Indian economy. Since these are the official updates, such releases set the benchmark for every analyst in India and abroad.

Today’s edition of ExplainSpeaking will attempt to provide you with an understanding of what to look for in the upcoming GDP data, how to read it so that just by looking at the press release you can understand the true state of the economy.

If you are completely unaware of what GDP means, what it measures and how, what are the criticisms against it as a measure of a nation’s well-being and how far are those criticisms justified then it would help to first read this detailed explainer.

If you already know what GDP is but do not trust India’s GDP data because you have heard several influential names question its credibility then here’s an article that will explain what has prompted such apprehensions and how far are they justified.

Here are five things you should watch out for when you look at the GDP data release for the first quarter.

1. Go beyond percentage change

After the release, the most quoted figure will be the percentage change but there are good reasons why you should look beyond this number.

It is widely believed that the Indian economy would have grown somewhere between 18% to 22% in the first quarter. In other words, the total value of all goods and services produced in India between the start of April and the end of June would have grown by, say, 20% over the total value produced in the same three months last year.

In any normal year, such a “year-on-year” comparison works very well. But this year, it may be quite pointless just to look at the percentage change.


Because, as many of you might recall, last year the Indian economy contracted by almost 24% in these three months (called the “first quarter of the Financial Year” or the “second quarter of the Calendar year”). Such a massive contraction implies that even a growth of 20% or 22%, which sounds great by itself, only resembles an economy barely getting back to the same levels of production that it had two years ago — that is, April to June 2019!

In fact, since the Indian economy contracted for the first half of 2020-21 and barely grew in the second half of 2020-21, it is quite likely that this year (2021-22), every quarterly GDP growth rate may appear quite fast. But, in reality, it would be only the “low base effect” in action.

Imagine the GDP was Rs 100 in the first quarter of 2019-20. Then it fell by 24% in 2020-21 to Rs 76. Now, if the GDP rises by 22% in Q1 of 2021-22 it would become Rs 93. But that is still Rs 7 short of the level where the economy was in 2019. Not to mention that two years lost in between.

As such, for the current financial year, you should look beyond growth rates and focus on the absolute numbers to better appreciate the current state of the economy.

2. Check whether private consumer demand has revived or not

Exactly a year ago, we had explained about the four engines of economic growth and their relative performance as the GDP contracted by a historic 24%.

In any economy, the total demand for goods and services — that is, the GDP — is generated from one of the four engines of growth.

In India’s context, the biggest engine is consumption (C) demand from private individuals like you and me. This demand typically accounts for 55% to 56% of all GDP.

The second-biggest engine is the investment (I) demand generated by private sector businesses. This accounts for 32% of all GDP in India.

The third engine is the demand for goods and services generated by the government (G). This demand accounts for 11% of India’s GDP.

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; often it is negative

So, if we try to calculate the GDP from the total demand of goods and services in the economy then

GDP = C + I + G + NX

So, if in a quarter or a year, Indians purchase a lot of goods and services produced within the country, businesses make a lot of new investments, the government spends a lot of money on different activities, and there is a much greater demand for India’s exports than our demand for imported goods then the GDP would be, as the expression goes, “firing on all cylinders”.

Look at the table below, which details what happened to GDP in Q1 of last financial year.

Quarterly estimates of expenditures on GDP in Q1 (April-June) of 2020-2021 (at 2011-12 prices)

As the red downward-pointing arrows show, the two biggest engines of economic growth went bust. The demand from both “C” (in the Table it is called the “Private Final Consumption Expenditure” or PFCE), as well as the demand from “I” (Gross Fixed Capital Formation or GFCF), fell by over Rs 5 lakh crore each (compared to the level in Q1 of 2019-20). In fact, the fall was so sharp that the absolute level fell even below the 2018-19 level for the first quarter.

The two smallest engines — G and NX — however, showed positive movement but it was not enough and the total GDP in Q1 of 2020-21 fell to Rs 26.89 lakh crore — 23.9% lower than the GDP in Q1 of 2019-20.

So the numbers to watch out for are the absolute levels of each of these components.


The Modi government’s strategy is to revive growth by stimulating private sector investments (“I”). To this end, the government has given tax breaks and other incentives to existing companies owners and new entrepreneurs.

But businesses are unlikely to ramp up investments unless private consumption demand rises. As such, it is important to see if, and to what extent, private consumption demand (“C”) — the biggest engine of India’s growth — has revived or not. It is the revival of C that will determine the fate of the Modi government’s growth strategy.

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3. Spot the sectors showing a revival

Oddly enough, when it comes to quarterly performance, the GDP is not the best way to look at the state of the economy. The better variable to track is GVA or the Gross Value Added by economic agents employed in different sectors of the economy. In reality, every quarter, it is the GVA data that is compiled and then GDP data is derived by adding all the taxes earned by the government and subtracting all the subsidies provided by the government.

In other words,

GDP = GVA + Taxes earned by the government — Subsidies provided by the government

So, it is quite possible that if you use GDP data to compare the health of an economy over two quarters (for example, Q1 FY22 vs Q1 FY21), the underlying performance (measured by GVA) might be the same, and the only reason for the difference in the GDP levels in the two quarters may be purely because either the government earned more taxes or spent more on subsidies!

Moreover, if you look at the GVA data, you will also get to know which specific sectors of the economy are doing well and which are struggling to add value. Just as the GDP data looks at the demand side of the national income, the GVA data looks at the supply side and provides a sense of whether producers in a particular sector are earning more money (by “adding value”) than before.

The table below gives a snapshot of how things were in Q1 last year.

Quarterly estimates of GVA at basic prices in Q1 (April-June) of 2020-2021 (at 2011-12 prices)

As can be seen, barring agriculture and allied sectors, which grew by 3.4%, all other sectors of the economy saw reduced earnings due to reduced production. The GVA contracted or fell by 22.8% to a level far below even the 2018-19 mark.

Thanks to the low base effect, it can be expected that all sectors will see a big positive growth number but again, one should look at the absolute numbers and see them in the context of where India was in 2019-20.

4. Is GDP more than GVA?

As explained, the difference between these two absolute values will provide a sense of the role the government played. If the government earned more 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 then the absolute level of GVA would be higher than the absolute level of GDP.

Considering that India has been witnessing a “K-shaped” recovery — wherein private sector firms in the formal sector have been doing quite well while millions of small and marginal firms, often in the informal sector, have been struggling to recover — it is hardly a surprise that government revenues have been soaring. In contrast, the government’s direct expenditure towards providing relief in the form of subsidies has been limited.

The net effect is that GDP is likely to be much higher than GVA owing essentially to the big gap between what the government earned through taxes and what it spent through subsidies.

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5. What are the Quarter-on-Quarter growth rates?

In contrast to calculating the year-on-year (YoY) growth rate, which is typically the norm in India, several economists also look at quarter-on-quarter (QoQ) performance.

In Q0Q, one compares how the economy did in one quarter as compared to the quarter just before it — instead of comparing it to the quarter exactly a year ago. One can calculate the QoQ growth rates for both GDP and GVA. In the present case, for instance, a QoQ growth rate would be derived by looking at the GDP numbers for Q1 of FY22 and comparing them to the GDP numbers of Q4FY21 (that is, January to March 2021).

The QoQ growth rates can often be quite different from YoY growth rates, and, as such, the choice of the reference quarter could make a world of difference when it comes to policy prescription.

Should India be calculating QoQ growth rates instead of YoY ones?

The short answer runs the risk of being viewed as an opinion. Here is a detailed piece explaining the various angularities involved.

Regardless of the Q1 data, the most important takeaway from the Covid-induced economic disruption over the past year is that when it comes to national income accounting, citizen’s health is the real wealth.

Get vaccinated, keep wearing masks and stay safe.

You can share your views and queries at


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