The likely gains in FY22 will only bring the economy at par with where it was at the end of FY20
Last two weeks saw a flurry of macroeconomic publications — the presentation of the Economic Survey for 2020-21, the Union Budget for 2021-22, and the first bi-monthly monetary policy review by the Reserve Bank of India.
But this flood of information also hid something crucial — the First Revised Estimates (FRE) of GDP growth in 2019-20, which were released by the Ministry of Statistics and Programme Implementation (MoSPI) on January 29.
In the past, we have explained how GDP revisions, even though a routine exercise, can be of importance, especially when the growth rate fluctuates significantly enough.
The latest revisions have not only tweaked the GDP growth rates for 2019-20 but also recalibrated the GDP growth rates of two more years — 2017-18 and 2018-19.
Accordingly, India’s GDP likely grew by just 4% in 2019-20 as against 4.2%. The MoSPI press release also dialled down the GDP growth rate for 2017-18 from 7% to 6.8%. However, for 2018-19, the GDP growth rate has now been moved up from 6.1% to 6.5%.
There are three main takeaways from this tweak of GDP data.
1: The extent of data revisions
Take the example of 2018-19. According to the First Advance Estimates for 2018-19 released on January 7, 2019, the GDP was to grow by 7.2%. Then Second Advance Estimates in February 2019 said the GDP would grow by 7%. The Provisional Estimates at the end of May 2019 pegged the GDP growth at 6.8%. Then the First Revised Estimates, released on January 31, 2020, revised the growth rate down to just 6.1%. Now the Second Revised Estimates for FY19 inform us that the GDP grew by 6.5%. To be sure, there are at least two more revisions left — the “third revised estimates” (another year down the road) and the “actuals” (two years hence).
Similarly, the year 2019-20 started off with Finance Minister Nirmala Sitharaman expecting the GDP to grow by 8%-8.5%. The First Advance Estimates in January 2020 finally accepted that the economy will grow by just 5%. By the time the year was over, the estimates pegged the growth rate at 4.2%. Now, a year later, the First Revised Estimates have been dialled down the growth rate to just 4%.
Another example is from 2016-17 when the GDP growth rate went up from 7.1% (according to the First Advance Estimates) to 8.3% in the final analysis.
Mind you, these revisions are for years before the Covid pandemic disrupted the Indian economy and none of them involves a change in methodology.
2: The importance of India’s GDP in 2019-20
The combined result of an 8% GDP contraction in the current year (2020-21) followed up by a (projected) 10%-11% GDP growth in the next financial year (2021-22) will be that, at the end of March 2022, the absolute level of India’s GDP will be almost the same as it was in March 2020 — that is, the end of 2019-20.
That makes the absolute level of India’s GDP — the total GDP expressed in rupee terms — in 2019-20 all the more significant.
But as things stand, given the extent of revisions — not just in 2019-20 data but also in GDP levels of preceding years — it would be hard to be sure of what India’s GDP was at the end of March 2020.
The year 2019-20 is also significant for another reason. Since the Covid disruption hit the Indian economy only in the last week or so of March 2020, the overall GDP growth of 2019-20 provides a good measure of how weak/strong the Indian economy was going into the pandemic. This, in turn, should ground our expectations about how fast can India grow from 2022-23 onwards — that is, once the low base effect of 2020-21 has run its course in 2021-22.
3: The “inverted-V” shape of India’s GDP growth rate during the past decade
The past decade started with policy paralysis and sub-optimal growth rate. But as the chart below alongside shows, India’s GDP growth rate followed an “inverted-V” shape before Covid brought the economy down to a complete halt.
The chart below gives a glimpse of the supply side of the economy. It maps the growth rate of the Gross Value Added (GVA) in India’s manufacturing sector. This, too, followed an inverted-V shape.
The manufacturing sector is possibly the most important sector for India as it has the capacity to absorb the maximum number of unemployed people in the country. The GVA growth rate of a sector shows how well that sector has grown over the years.
The upshot: There is much talk about India registering a “V-shaped” recovery in the next financial year (2021-22). But, what the data above suggests is a more broad-based loss of growth momentum in the economy before Covid. The likely gains in FY22 will only bring the economy at par with where it was at the end of FY20.
In other words, the actual recovery — whatever be its shape — will start once India starts growing beyond the FY20 levels of GDP.
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