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Thursday, July 09, 2020

ExplainSpeaking: Why provisional GDP estimates due this week are crucial for recovery

As it happens, Covid did not change much from a policy perspective because even before Covid struck, the Indian economy was decelerating sharply, thanks to a dip in demand.

Written by Udit Misra | New Delhi | Updated: May 27, 2020 10:40:44 am
Many of you, especially those who don’t track the economy closely, may be misled by the nomenclature — the use of the word “provisional” — to think it is just a routine exercise.

Dear Readers,

The biggest news on the state of the Indian economy will come towards the end of this workweek — on May 29, to be precise — when the Ministry of Statistics and Programme Implementation (MoSPI) releases the “Provisional Estimates” (PE) for the last financial year — that is, 2019-20.

Many of you, especially those who don’t track the economy closely, may be misled by the nomenclature — the use of the word “provisional” — to think it is just a routine exercise.

True, in normal (financial) years — that is when the economy neither grows too fast nor grows too slow — the difference between different GDP estimates — First Advance Estimate (FAE), Second Advance Estimate (SAE), Provisional Estimate (RE), First Revised Estimate (FRE) and Actuals (A) — is minimal.

But in years of sharp ups and downs, these routine estimates show significant changes (see Table).

Source: MoSPI, Union Budget documents

For instance, according to the FAE for FY19 (2018-19) released in January 2019, the GDP was to grow by 7.2%. Then SAE in February 2019 pegged GDP growth rate back to 7%. Then the PEs at the end of May 2019 said the GDP grew by 6.8% in FY19. But the biggest revision was done by the FRE released on January 31 this year and it said the GDP grew by just 6.1% in FY19.

Economy has repeated grown slower than expected 

In short, in 2018-19, between the Budget Estimate and the First Revised Estimates, the GDP growth rate was rolled back from 7.5% to 6.1% and we still haven’t heard the last of it.

Something similar, and possibly even more dramatic, is likely to happen to estimates for 2019-20.

At the start of the financial year, Finance Minister Nirmala Sitharaman had expected a growth rate of 8%-8.5% for FY20. But, given the fact that the economy was already sliding as evidenced by the periodic rollback of growth estimates for FY19, FM’s hopes were found to be gravely misplaced.

As the year went by, one after the other, each forecaster rolled back GDP estimates with even the government’s own estimate — the FAE in January — pegging growth at 5%, roughly 300-350 basis points below the Budget estimate. Further, by all accounts, the deceleration in economic activity continued in the last quarter (January to March) of 2019-20 and most expect the eventual GDP growth to be distinctly below even 5%. The PE on Friday will provide clarity on this.

These estimates are also early awaited because, to a great extent, they will provide a clear cut picture of where the Indian economy stood before Covid-19 made its impact since the nation-wide lockdown started in the last week of March.

Having said that, many readers may still question the merit in fussing over the GDP data for the last financial year. After all, that year is done and dusted, and what really matters is what happens to the GDP in the current financial year as India faces a grave crisis brought on by Covid-19.

This, too, is a reasonable belief. But oddly enough, Covid-19 did not change anything from a policy perspective because even before the pandemic, the Indian economy was decelerating, thanks to a dip in consumer demand. That is why, despite a massive corporate tax cut (which cost the government Rs 1.5 lakh crore in revenues forgone), businesses steered clear of making any new investments. Indian exports were already struggling for years. Ultimately, it was only the government expenditure that was pushing the economy.

Covid-induced lockdowns have just intensified this very cycle. Incomes have completely stopped, thus resulting in an even more dramatic decline in demand. With businesses not interested in ramping up production, India’s GDP is now expected to contract substantially.

ExplainSpeaking: Watch for signals at airports and rail stations – and at the LAC

In other words, the pandemic hasn’t changed India’s growth trajectory — we were hurtling down anyway — it has just made that decline even more precipitous; to such an extent that instead of decelerating, our economy is now contracting.

But this means the provisional GDP data carries crucial clues for the FM and her team to understand which sectors were struggling the most anyway (say manufacturing or trade) and which could lead us to recovery (say agriculture) and the policy mix needed for turning around the economy.

Last but not the least, the provisional estimates on Friday will provide the essential basis for forecasters to start projecting GDP for the current year. There is only one difference though: unlike normal year, when this data would have resembled the floor for the next year’s growth, this time, it is likely to be the roof.

Stay safe,

Udit

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