On Friday, Ministry of Statistics and Programme Implementation (MoSPI) released the data for the fourth quarter (January to March) of the last financial year (2019-20) as well as the provisional estimates of the full-year GDP growth rate.
The provisional figure, which is likely to be revised again by January next year when MoSPI releases the First Revised Estimates for FY20, states that the Indian economy grew by 4.2% in 2019-20 (see Table 1). This is the lowest annual growth rate of GDP registered under the new GDP data series which uses 2011-12 as the base year.
This is not only a far cry from the 8.5% growth that the government expected in July 2019 when it presented the Budget for that year but also significantly lower than the 5% that the Second Advance Estimates suggested at the end of February earlier this year.
Nominal GDP plummets
This is, of course, the growth rate in real GDP. A similar fall can be seen in the trajectory of the nominal GDP, which is the observed variable. Real GDP is arrived at by subtracting the nominal GDP growth by the inflation level.
At the time of the 2019-20 Budget presentation in July, nominal GDP was expected to grow by 12%-12.5%. By the end of it, provisional estimates peg it at just 7.2%. In 2018-19, the nominal GDP grew by 11%.
This sharp deceleration in nominal GDP growth, more than anything else, shows the continued weakening of India’s growth momentum even before it was hit by the Covid-19 induced lockdown in the last week of March.
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Reflects poor fiscal marksmanship
There are two reasons why this sharp deceleration in the nominal GDP matters.
First of all, the nominal GDP growth rate is the base of all fiscal calculations in the country. The government bases its calculations — say the amount revenues it will raise and the amount of money it will be able to spend — on this initial assumption. A sharp divergence in nominal GDP growth rate basically upsets all other calculations in the economy. For instance, a sharp fall means the government does not get the revenues it had hoped for and, as such, it can’t spend as much as it wanted to.
Secondly, the substantial deceleration in nominal GDP growth reflects poorly on the government’s fiscal marksmanship. In other words, it shows that the government was not able to assess the magnitude of economic growth deceleration that was underway.
Poor fiscal marksmanship, in turn, leads to inaccurate policy making because a government could end up making policies for an economy that doesn’t actually exist on the ground.
For instance, it can be argued that in an economy that was slowing down sharply and that too on account of a decline in demand, even a massive corporate tax cut would be ineffective. To be sure, despite this once-in-a-generation reform, private investments actually fell by almost 3% in 2019-20 — in sharp contrast to the 9% increase in 2018-19.
The provisional estimates released on Friday specifically bring out this weakness as they included significant downward revisions on quarterly GDP estimates.
Frequent and significant revisions in quarterly GDP
India’s national income accounting data — the new GDP data series using 2011-12 as the base year — has come in for a fair bit of criticism in the past.
This questioning grew deeper when Arvind Subramanian, who was the Chief Economic Advisor to India’s Finance Ministry between 2014 and 2018, argued, in 2019, that the new series overestimated India’s GDP by as much as 2.5 percentage points.
While that debate is not yet settled, the credibility of India’s GDP estimates is not helped by frequent and significant revisions.
Look at Table 2 to see how the provisional estimates have fluctuated repeatedly. The growth estimate for Q2 (July, August and September), for instance, has gone from 4.5% to 5.1% and back to 4.4% in a matter of just 5 months (between January and May 2020).
In particular, it is now becoming clear that all through 2019-20 India’s growth rate was decelerating much faster than what was officially accepted at that time.
For instance, in July, which falls in the second quarter, the government insisted that the full-year real GDP will grow by 8.5% even though all indicators suggested a fast growth deceleration. This is eventually being borne out by the provisional estimates (last column in Table 2).
A warped economic structure
Another key takeaway from the provisional GDP estimates is the undesirable emerging structure of the Indian economy.
It has been repeatedly and unanimously argued in the past, across all hues of governments, that for India to grow and create jobs for the millions that enter its workforce each year, manufacturing growth has to rise. Together with services, manufacturing growth was supposed to absorb the millions still dependent on agriculture, which even when it grows fast, does not have the ability to raise per capita income in a big way. If India was to create lots of well-paying jobs that allow it to reap the so-called demographic dividend then it had to be via manufacturing growth.
But 2019 paints a dismal picture in this regard (see Table 3). While the agriculture and allied sectors enjoyed buoyant growth, as the year progressed, manufacturing simply lost its way — contracting for three of the four quarters.
The provisional GDP estimates for 2019-20 support the notion that the growth deceleration since 2016-17 simply became worse as the last financial year progressed.
In the last quarter of the financial year, the economy grew by just 3.1%. It shows that the economy had already become quite vulnerable before Covid-19 hit India at the end of March.
Of course, given the trend of repeated downward revisions, it is likely that even these provisional estimates may turn out to be optimistic.
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