COVID pandemic with a series of lockdowns has stalled the economic activity in most of the countries. As we look at the negative growth rate in India, the immediate future of the economy looks bleak. Globally there is a fallout that has potentially disrupted the foundations of our economic design. The series of numbers presented by the government needs to be understood correctly, at this point it also becomes quintessential to evaluate the relevance of the numbers. What is Gross Domestic Product? What are the controversies in the calculation and how important is the number?
GDP of a country helps in assessing the total value of production and service in an economy. It is an indicator that is popularly used, a rising GDP signals a growth rate and implies the economy is moving forward. On the other hand, if the Gross Domestic Product is falling, the economy is contracting. Recent estimates of India’s GDP presents a negative growth rate of 24 per cent and followed by the UK─ fall in the growth rate of 20 per cent in the first quarter of FY20.
David Pilling in his book ‘Growth Delusion’ decodes the reality behind numbers and asserts the statistical tool might just be misleading. Discussions on GDP dominate the modern economic discourse, however, these measurements are devised for viewing certain aspects of the economic status. But does this indicate how people are well-off in a country?
The concept of growth in the context of studying performance is limited in making a broad comparison over a period of time and comparing across countries. At this juncture, as the global economies are facing a downtrend the quarterly estimates are the proxy to comprehend the direction of the economy.
Theoretically, GDP can grow during a war or after a terrorist attack as the country would spend more on rebuilding the infrastructure but this does not imply the people are well off. Opponents of GDP hence believe mere figures can be rather misleading. Genuine Progress Indicator(GPI) was developed in 1995 by a socially responsible think tank called Redefining Progress. The indicator calculations use economic statistics and mathematical formulas to place value on the social, economic, and environmental variables. The final result is then added to or deleted from the GDP figure. For example, the cost of wetlands lost is subtracted from GDP. The indicator was developed as an alternative to the traditional GDP measure of a nation’s economic and social health. Even GPI suffers from limitations and has certain dissent on what accounts for an increase in wellbeing. Although the growth versus development debate must continue in tangent lines — from positive economics— growth rate remains to be relevant. Also, for a short term comparison, there is a lack of economic tools to comment on welfare and development. Limiting the purpose of quarterly estimates to just analyzing the condition of the overall economy, the growth rates aid in macroeconomic policymaking.
The recent GDP estimates released by the Ministry of Statistics and Program Implementation (MOSPI) are Quarterly estimates and Year-on-Year basis. Real GDP growth rate at constant year price (2011-12) was accounted to arrive at INR 26,89,556 crores. Last year in the same quarter the Real GDP was INR 35,35,267 crores, the fall in total production of goods and services is largely due to the six months lockdown.
Continuous fall in growth rate for India has worried many and the contractions are severe especially in construction, manufacturing and service sectors.
Only the agriculture sector has experienced a positive growth figure of 3.5 per cent in the past quarter. Among the key sectors, the steel industry continues to suffer a decline in growth of 30 per cent and hopefully unlocking of the economy is expected to bring some relief. The consumption demand has slowed substantially during the lockdown but it is worth noting the rural demand was facing a slump even before the pandemic.
The GDP numbers calculated for this quarter is by expenditure method which includes private final consumption expenditure, government expenditure, Gross Fixed Capital Formation (private investments) and net exports. The government expenditure has increased by 16 per cent since last 2019 same quarter and exports fell by almost 20 per cent. Investments declined by 47 per cent which contributed to a major fall in growth rate. The real GDP growth rate has fallen more than the Nominal GDP growth rate (22%)─ due to an increase in inflation.
The main difference between nominal GDP and real GDP is the adjustment for inflation. Since nominal GDP is calculated using current prices it does not require any adjustments for inflation.
India’s Growth Trajectory
The US economy’s decline in growth rate was reported to be 30 per cent ─annualized growth rate for the year. It implies the average growth rate was down by 30 per cent but the same Y-o-Y rate for this quarter is negative 9.1 per cent. India’s annualized growth rate is yet to be disclosed and comparing the US rate with India’s quarterly estimates would rather be misleading.
Year-on-Year calculation compares a statistic for one period to the same period the previous year. The period could be either for a month or quarterly basis.
According to the Organization of Economic Cooperation &Development (OECD) reports, comparing annualized growth rates across countries is not recommended. For the purpose of extracting the impact of COVID-19 on the economy, quarterly estimates are the appropriate measure. Usually, countries tend to follow different methods and accurate comparison and results would be impossible. India and China follow Year on Year basis while the US and Japan follow an annualized growth rate.
Replicating India’s calculation format, the US would report a fall in the growth rate of 9.1 per cent for the current quarter.
Looking back at India’s annualized growth rate, since 2004 there was a dip during the 2008 financial crisis. Since then the growth rate peaked in 2016 and has been falling moderately till 2019. This trend suggests that the lockdown was not entirely the reason for such a downfall in growth rate. Even before the pandemic, India’s growth story has been less compelling. Structural issues in the economy were weakening the demand but the lockdown furthered the demand and led to a severe supply shock. The symptoms of failures in the economic machinery were conspicuous since 2019 with increasing unemployment and poor demand.
GDP figures need to be viewed as an indicator to measure the economic outcome and the estimates remain to be the best tool for policymakers. The systemic issues in the labour market and the financial system has to be countered with decentralized policy measures.
While comparing the figures with other countries are overwhelming but blaming just the lockdown would be an oversimplification of the problems.
Inputs for the article was given by Ananya Consul and Medha Ahuja