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Economy grows 20.1% in Q1, lags pre-COVID level

Context:

Economic statistics for the first quarter of the current fiscal (April to June period), released by the National Statistical Office (NSO) shows that India’s Gross Domestic Product (GDP) has grown by more than 20% in the first quarter of 2021-22.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy)

Dimensions of the Article:

  1. About the latest economic data on Q1
  2. What is Base-effect?
  3. Other Important Trends in Economy

About the latest economic data on Q1

  • India’s Gross Domestic Product (GDP) has grown by 20.1%, while the Gross Value Added (GVA) in the economy has risen by 18.8% in the first quarter of 2021-22.
  • Manufacturing and construction have been the key drivers in GVA growth and the higher private consumption and investment have helped in impressive GDP performance.
  • GVA from agriculture, forestry and fishing, the only sector to grow amid last year’s national lockdown, has registered an impressive 4.5% growth in Q1 2021-22 too.
  • Despite the government’s claim of the impressive GDP and GVA numbers of the Q1 2021-22 being indicative of a V-shaped economic recovery, eminent economists have cautioned about reading too much into the record quarterly growth.
  • Though the GDP and GVA have registered a notable rise, they are lower than their contraction observed during the corresponding quarter of the previous fiscal.
  • This implies that the economic activity has remained well below the pre-pandemic levels, owing to the second wave of COVID-19, indicating that the economy still has some way to go before it returns to activity levels prevalent prior to the pandemic.

Base effect reason for the boost

  • The growth rates in 2021-22 in some cases are unduly high due to the low base. This could be analytically misleading.
  • Construction and Manufacturing GVA recorded a 68.3% and 49.6% increase between April and June this year.

What is Base-effect?

  • The base effect is the effect that choosing a different reference point for a comparison between two data points can have on the result of the comparison. This often involves the use of some kind of ratio or index value between two points in a time-series data set, but can also apply to cross-sectional or other types of data.
  • Using a different reference or base for comparison can lead to a large variation in ratio or percentage comparisons between data points – hence, base effect can lead to distortion in comparisons and deceptive results, or, if well understood and accounted for, can be used to improve our understanding of data and the underlying processes that generate them.

Other Important Trends in Economy

  • Electricity, gas, water supply and other utility services, which have registered impressive growth numbers are the only other sectors along with agriculture, forestry and fishing, to recover beyond the pre-pandemic levels of 2019-20.
  • The share of consumption expenditure in GDP has been low this time which indicates that the second wave and lockdowns impacted households more than the first wave. This does not augur well for the economic recovery process.
  • Low incomes lead to low disposable income in the hands of the general populace. This in turn will lead to depressed demand in the economy which will invariably impact the economic recovery process.
  • Despite impressive growth numbers in employment- and contact-intensive services sector like Hotels, Transport, their absolute contribution continues to be substantially below 2019-20 levels.
  • The government final consumption expenditure (GFCE) has contracted by 4.8% in Q1 2021-22.
  • Also, there has been a substantial decline in public capital and revenue spending in July 2021.
  • This is indicative of the government’s fiscal prudence attitude in order to contain the fiscal deficit even during a time when major economies have relied on large fiscal stimulus to revive their economies.

-Source: The Hindu

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