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NO GREEN SHOOTS OF A REVIVAL IN SIGHT AS YET

Why is news?

On February 28, as per its release calendar, the National Statistical Office (NSO) put out the third quarter gross domestic product (GDP) estimates, that is, for October-December 2019.

Is it Economic Revival?

  • Domestic output grew at 4.7% at constant prices (that is, net of inflation) in 2019, compared to the same period of 2018.
  • Hence, many concluded that the economic slowdown witnessed during the last six quarters has “bottomed out”; government spokespersons endorsed the view.
  • However, a closer reading reveals that the latest data release has revised the estimates of the first two quarters of the current year (2019-2020) upwards to 5.6% and 5.1%, from the earlier figures of 5% and 4.5%, respectively.
  • The slowdown has continued, not bottomed out; hence, there is no economic revival in sight as of now.

Why did the current year’s Q1 and Q2 GDP estimates get revised upwards?

  • The answer is this was simply because the corresponding figures for the previous year (2018-2019) got revised downwards.
  • Many viewed the revision of last year’s estimates as evidence of lack of credibility of the NSO’s revision process.
  • Such doubts are well taken, given the long-standing debate and unresolved disputes on the veracity of GDP figures put out since 2015, when the statistical office released the new series of National Accounts with 2011-2012 as base year.

Why the annual GDP estimates undergo revisions?

  • GDP is a statistical construct — unlike the temperature on a thermometer — prepared using many bits of quantitative information on an economy’s production, consumption and incomes.
  • Many statistical models and methods are used following standardised analytical procedures in line with the international guideline called the UN System of National Accounts (UNSNA).
  • The GDP revision followed the latest (2008) edition of UNSNA. As there are lags and unanticipated delays in obtaining the primary data, the GDP estimates undergo several revisions everywhere (except in China).
  • GDP estimates are revised five times in India over nearly three years.
  • The initial two rounds, the advanced estimates, are prepared mainly using high-frequency proxy indicators (which probably contain more noise than information), followed by three rounds based on data obtained from various sectors.

What is the Quality of GDP Estimates?

  • Since 1999, quarterly GDP estimates are being prepared, as per the International Monetary Fund (IMF)’s data dissemination standards.
  • Nearly one-half of India’s GDP originates in the unorganised sector (including agriculture), whose output is not easily amenable to direct estimation every quarter, given the informal nature of production and employment. Hence, the estimates are obtained as ratios, proportions and projections of the annual GDP estimates.
  • Hence, the quality is subpar as the primary data needed quarterly are mostly lacking.

What does the Latest Data Show?

  • If we accept the latest data, it is clear, though in an alarming way, that there has been an undeniable decline in the GDP growth rate over seven consecutive quarters, from 7.1% in Q1 of 2018-2019 to 4.7% in Q3 of 2019-2020.
  • Considering that physical indicators of production, such as the official index of infrastructure output, or monthly automotive sales, continue to show an unambiguous deceleration, the economic slowdown has apparently not bottomed-out
  • More seriously, the quarterly GDP deceleration comes over and above the annual GDP growth slowdown for four years now: from 8.3% in 2016-17 to 5% in 2019-20 (as per the second advance estimate).
  • Further, it bears repetition that many have questioned the entire GDP revision since 2015 to the new base-year for possible over-estimation of output growth.

Conclusion

  • To conclude, India’s quarterly GDP estimates have limited primary information in them.
  • Their revisions are largely extrapolations and projections of the annual figures.
  • Hence, one should be cautious in reading too much into the specific numbers.
  • They are helpful to discern the broad trends in economic activity, which appear grave at the moment.
  • Economic growth continues to drift downwards, from a peak of 7.1% in the first quarter of 2018-19 to 4.7% in the third quarter of the current year.
  • It probably suggests more pain ahead, as the green shoots of economic revival seem nowhere in sight.
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September 2022
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