Confusing GDP and GVA numbers

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  Confusing GDP and GVA numbers

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• A new confusion: The NSO of MoSPI reported that the economy expanded far less than expected in the third quarter (October to December 2020), and estimated it will shrink 1.1% in the fourth quarter from a year ago (FY 20). This is not consonant with the high frequency indicators tracked by economists, and also GVA nos. coming in. 
• GDP and GVA: In national accounting, GDP equals GVA plus indirect taxes minus subsidies. Indirect taxes grew sharply in the third quarter. So, for GDP to grow at a much slower pace than GVA, subsidies would have had to grow strongly, and by more than all the pandemic-related subsidies that the government has announced. 
• Food subsidy: That is so because the budget on 1 February, 2021 made it clear that over the next two years, the government will pay off the past dues it owes Food Corporation of India (FCI), which is the intermediary for food subsidies in India. It will be the equivalent of 0.9% of GDP in 2020-21 (which runs from April 2020 to March 2021), and 0.3% of GDP in 2021-22. These repayments likely resulted in bloated subsidy growth, thereby depressing third-quarter and fourth-quarter growth estimates. And there's one more accounting problem!
• Cash and Accrual basis accounting: Look at FCI and the central government. If both did accrual accounting, we would not have a problem. FCI would account for subsidies in the year they accrued, and the government would account for them in the same year too. In this situation, GDP would be a better indicator of underlying growth in the economy, rather than GVA, because it strips out the subsidy payments which tend to inflate GVA. 

1. The problem is that FCI does ‘accrual accounting’ while the government does ‘cash accounting’. So discrepancies arise if the subsidies in FCI’s books accrued, say, last year, but the government only paid up in the current year. To arrive at the GDP number, the statistics office would end up subtracting from current GVA more subsidies than what accrues in the current year. This would lead to an underestimation of GDP growth in the current year. 
2. Indeed, the statistics office’s 2020-21 advance estimate for GDP growth is -8%, lower than the GVA advance estimate of -6.5%. About half of the 1.5 percentage point difference, by our calculation, is because of distortions created by the payment of past subsidy dues.
3. The government has owed money to FCI in recent years, and the amount picked up rapidly from 2017-18. Over this period, FCI would have accounted for the subsidies in its books (following accrual accounting), and this would show up in GVA. However, the government did not pay up on time. 
4. As such, a smaller cash subsidy amount was deducted from GVA to arrive at GDP (since the government does cash accounting), thereby potentially overstating the country’s GDP growth in that period.

• Extent of problem: By how much could future growth numbers be impacted? The underestimation in 2020-21 GDP growth could inflate 2021-22 numbers because of a low statistical base. However, some of the base effect gains could be offset by the balance payment of past subsidy dues (budgeted at 0.3% of GDP in 2021-22), which would depress GDP (as it did in 2020-21). On net, the positive base effect overshadows the negative payment of subsidy dues, leading to GDP growth being overstated by 1 percentage point in 2021-22. Finally, the repayment of balance dues in 2021-22 could impact 2022-23, again due to low base effects. GDP growth may be overestimated by half a percentage point in 2022-23.
• True numbers: What is India’s ‘true’ economic growth? In normal times, GDP is a more wholesome indicator of economic growth than GVA, because it includes the government as well. But with GDP impacted by the payment of previous-year subsidy dues, the GVA will better reflect economic growth in 2020-21, 2021-22 and 2022-23, or until whenever these puzzling GDP numbers abound.

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