Making sense of the advance GDP estimates

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The National Statistical Office (NSO) released the first advance estimates of GDP for 2021-22 on January 7 and put the number at 9.2%. This is 30 basis points – one basis point is one hundredth of a percentage point – lower than the Reserve Bank of India’s (RBI) December 2021 projection of 9.5%. Beyond the headline number what do the latest GDP estimates mean for the economy at large? Here are three charts which put this in perspective.

The consumption challenge

Private consumption accounts for more than half of India’s GDP. It is here that economic recovery faces its biggest challenge. While overall GDP is expected to be slightly higher than the pre-pandemic level (2019-20) in 2021-22, Private Final Consumption Expenditure (PFCE) will continue to remain below the 2019-20 level. What has been the trajectory of PFCE in the post-pandemic period?

A review of half-yearly and quarterly GDP aggregates – quarterly GDP numbers are available till September 2021 and we can estimate GDP in the second half of 2021-22 from the first advance estimates – can provide an answer.

Overall GDP came back above pre-pandemic levels in the second half of the last fiscal (October 2020-March 2021). However, PFCE did not share this recovery and was 0.1% less than the pre-pandemic PFCE level in the corresponding period. To be sure, PFCE did go above pre-pandemic level in the quarter ending March 2021. However, this was more a result of pre-pandemic PFCE level being lower because of pandemic-related worries – PFCE annual growth in March 2020 was just 2%, the lowest since June 2012 – than a sharp rise in consumption demand in the March 2021 quarter.

The second wave of Covid-19 – it peaked on May 9 in terms of seven-day average of daily new cases – inflicted a major shock to PFCE once again, which contracted by 11.9% below pre-pandemic levels in the quarter ending June 2021. This disruption percolated into the second quarter of 2021-22 as well, with PFCE showing a deficit of 3.5% vis-à-vis pre-pandemic levels in the quarter ending September 2021. The latest advance estimates show that PFCE will cross pre-pandemic levels on a half-yearly basis for the first time in the second half of 2021-22. While the advance estimates project a 1.7% growth over pre-pandemic levels in the second half of 2021-22, the impact of the third wave might generate headwinds for these prospects.

If some private sector estimates are to be believed, economic activity was losing momentum even before the third wave erupted. “While the economic impact of the Omicron wave in 4QFY22 could be lower than previous waves, the activity momentum in 3QFY22 was much lower than our expectation. This has led us to revise downwards our FY22E real GDP forecast by 80bps to 9.0%YY, largely due to weaker 3Q activity”, a research note by Samiran Chakraborty Chief Economist India at Citi Research said.

See Chart 1: PFCE growth over pre-pandemic levels

Employment-intensive services continue to suffer

If one looks at the Gross Value Added (GVA) statistics in the latest advance estimates, only one sub-sector of the services sector is expected to remain below pre-pandemic levels. This is the trade, hotel, transport, storage and communication subsector of the economy where the GVA component in 2021-22 is expected to remain 8.5% below the pre-pandemic level. This subset of the service sector not being able to regain pre-pandemic levels could have played a major role in the lag in private consumption demand. This particular sector had a share of 18.5% in total employment in 2018-19, the largest among major subsectors outside agriculture, as per data from the Periodic Labour Force Survey (PLFS). The performance of this important subsector could actually end up being worse than what the advance estimates project because of disruption from the third wave of Covid-19. “The adverse growth impact of the third wave should be more muted than previous waves, but services will still take a larger hit”, a Nomura Research note issued on January 10 said.

See Chart 2: Sector-wise GVA growth over pre-pandemic level and employment share

Surge in nominal growth: positive fiscal shock but adverse terms of trade shock to farm incomes

Among the most important takeaways of the latest GDP numbers is the fact that at 17.6%, nominal GDP growth is going to significantly exceed the budgetary projection of 14.4%. Coming weeks before the Budget, this is good news on the fiscal front as a higher than expected nominal GDP also means higher than expected tax collections. Nominal GDP exceeding the budgetary projection will be a first under the current government, as was pointed out in an HT analysis in December 2021 (https://bit.ly/3JYjMHc).

While inflation-driven higher nominal GDP growth is good news for fiscal math, it is bad news for the purchasing power of those dependent on farm incomes. This is because the current surge in inflation is mainly driven by non-food items. The divergence in inflation in food and non-food items is evident in the GVA numbers as well. While nominal growth component (nominal minus real GVA growth) for agricultural and non-agricultural GVA was 2.9 and 2.8 percentage points respectively in 2020-21, this difference has increased to 5.2 and 10 percentage points for 2021-22. The sharp rise in nominal growth differential between agricultural and non-agricultural economy also means that the former will find it difficult to afford the same basket of the latter’s commodities for the same amount of real output. This means that rural tailwinds to the larger economy are likely to weaken going forward.

See Chart 3: Nominal growth component of agriculture and non-agriculture


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