An analysis of GDP figures for Q1, 2021-22

A full udpate on first quarter GDP and GVA numbers for FY 2021-22

 An analysis of GDP figures for Q1, 2021-22

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• The story: India's GDP growth has been struggling for a few years now, especially post-demonetisation and GST launch. The pandemic led to a massive contraction. Naturally, the interest in latest quarterly growth figures is quite high.
• Q1, FY22: The Ministry of Statistics and Programme Implementation (MoSPI) released the GDP data for the first quarter of the current financial year (2021-22), showing an increase by 20.1% in the GDP, and by 18.8% in the GVA, compared to the first quarter of 2020-21.

1. GDP for Q1, 2021-22 (constant 2011-12 prices) was Rs.32,38,020 crores, compared to Rs.35,66,708 crore for Q1 of 2019-20
2. GVA for Q1, 2021-22 (constant 2011-12 prices) was Rs.30,47,516 crores, compared to Rs.33,05,273 crore for Q1 of 2019-20
3. GVA for Q1, 2021-22 (current prices) was Rs.51,22,877 crores, compared to Rs.50,04,209 crore for Q1 of 2019-20
4. GVA for Q1, 2021-22 (current prices) was Rs.46,19,947 crores, compared to Rs.45,77,215 crore for Q1 of 2019-20

• Low base effect: The base for comparison was very low, as the complete nationwide lockdown during Q1 of 2020-21 had crushed GDP growth. The GDP and GVA had contracted by 24.4% and 22.4%, respectively, in Q1, 2020-21.
• Understanding demand and supply: The GDP and GVA reflect the overall demand and total supply in the economy.

1. GDP is the total monetary value of final goods and services, bought by the final user, produced in a country in a given period of time. It measures the value of total output in the economy by tracking the total demand.
2. GVA is Gross Value Added and gives how much monetary value was added in different productive sectors of the economy. It tracks the total output by tracking total supply.
3. Ideally, both must give the same figure, but for the government's presence! It imposes taxes and also provides subsidies, bringing some changes.
4. The link is: GDP = GVA + [Taxes by government — Subsidies by government]
5. This difference (GDP - GVA) is the role the government played in the national economy
6. GDP will be higher than GVA if taxes exceed subsidies, not otherwise.
7. In Q1 of 2021-22, India’s GDP grew by 20.1% while the GVA grew by 18.8%. These are year-on-year comparisons.

• Is Indian economy recovering: If by "recovery" we are looking at a sharp "V shape" uptick, then "no", it it not. Why not? Because India’s total output in Q1, whether GDP or GVA, is not even what it was in Q1 of 2019-20 (the year before pandemic). The levels are closer to 2017-18 levels. So India produced the same amount of goods and services in Q1 2021-22 as in Q1 2017-18. The large numbers now, as everyone understands, are percentage figures. Actual quantum of GDP has shrunk by 17% approx.
• Simple arithmetic: If the GDP in Q1 of 2019-20 was Rs.1000, then it fell by 24% in Q1 of 2020-21 to Rs.760. Then in Q1 of current year it rose by 20% to become Rs.910. So actual output is Rs.90 lower than it was two years ago. And don't forget the actual positive growth that would have happened without the pandemic (and other earlier problems).
• Engines of GDP: The four major engines of economic growth in Indian GDP are the PFCE (C), GFCF (I), GFCE (G), and Net Exports (NX). So, GDP = C + I + G + NX

1. The biggest engine is consumption (C) demand from private individuals (PFCE - Private Final Consumption Expenditure), accounting for more than 55% of GDP. The PFCE for 2021-22 Q1 is at the level seen in 2017-18.
2. The second-biggest engine is the investment (I) demand generated by private sector businesses (GFCF - Gross Fixed Capital Formation), accounting for 32% of GDP. The GFCF is at levels in 2018-19, despite government giving major tax breaks for corporate sector.
3. The third engine is the government's demand for goods and services (GFCF - Government Final Consumption Expenditure), which has dropped, although the government is expected to use a “counter-cyclical” fiscal policy and spend more than usual.
4. The fourth engine is the demand created by “Net Exports” (NX), got by subtracting the demand Indians have for foreign goods (imports) from the demand that foreigners have for Indian goods and services (India’s exports). India imports more than it exports, so this is a small engine of growth; and is often negative.

• Components of GVA: The GVA table is made up of "sectors" - Primary (1-Agriculture, Forestry & Fishing; 2-Mining & Quarrying), Secondary (3-Manufacturing; 4-Electricity, Gas, Water Supply & Other Utility Services; 5-Construction;), and Tertiary (6-Trade, Hotels, Transport, Communication & Services related to Broadcasting; 7-Financial, Real Estate & Professional Services; 8-Public Administration, Defence & Other Services).

1. Only two sectors — Agriculture etc. and Electricity and other utilities — managed to grow more than they did in 2019-20.
2. The GVA of ‘Trade, Hotels, Transport, Communication & Services related to Broadcasting’ and ‘Construction’ is less than what it was even in 2017-18. These two sectors create massive no. of jobs for both unskilled and skilled workers and unemployment rises if they fall.

• Summary: Indian economy was struggling since much before the Covid pandemic. And the recent gains made by corporates are all at the expense of households and tiny firms (MSMEs mostly). Since the economy is under-performing, a lot of production not happening today may never happen at all. The government's focus is largely on the supplys-side reforms, but there's a lot of work to be done on the demand-side as well. Crores of new jobs, and associated incomes, must happen now.
• EXAM QUESTIONS: (1) Explain the nature of GDP growth India is undergoing, looking at the Q1 figures for 2021-22. (2) What are the four major engines of GDP growth? Which ones are under-performing? Explain. (3) The nature of India's GDP slowdown and recovery carries in it a big risk that long-term impediments are perhaps getting built. Do you agree? Explain how.

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