News/ Context: In the July to September quarter (Q2) for the current financial year (2021-22), India’s gross domestic product (GDP) grew by 8.4% as per the National Statistical Organization. Last year the same quarter witnessed 7.4% contraction due to covid restrictions.
The First quarter of the current financial year (2021-22) saw a growth of 20.1%, while the first of this year has recorded 13.7% growth. India is likely to record double digit growth for 2021-22. The government is hopeful of a fast recovery, but the economists are not fully convinced.
Real Comparison : All the comparisons done above regarding growth are with respect to the previous financial year 2020-21. The year of 2021-21 was full of covid restrictions and lockdowns. The production in the year 2020-21 was very low, around 135 lakh crore in comparison to 145 lakh crore in the precovid financial year of 2019-20, calculated on the prices of base year (2011-12). If the GDP of FY 2021-22 is compared to 135lakh crore, it will obviously show a greater growth percentage. It is called Base Effect. Percentage shows high because of the low base. Hence to get a real picture, the GDP of FY 2021-22 should be compared to the GDP of FY 2019-20, not with FY 2020-21.
In this way the absolute GDP in the second quarter (Q2) of FY 2021-22 was 0.3% higher than pre pandemic levels (compared from Q2 of FY 2019-20) reflecting that there are still many worrying areas.
The private consumption spending still languishes below preCOVID levels along with activity in employment intensive sectors like construction and contact intensive sectors like retail and hotels. The base effect of negative growth last year also helped nudge the GDP numbers up, most independent economists saying. Although the Chief Economic Advisor said the base effect by itself does not make the recovery ‘less noteworthy’.
Investments from the Government, continued to remain the key growth drivers while private consumption is yet to show a decisive recovery.
Only gross fixed capital formation, on the domestic demand side, emerged positive in Q2 over the 2019-20 level. Private final consumption expenditure , in terms of its magnitude, is still lower. Even if the pace of recovery is sustained in the next two quarters, India’s GDP for the year is expected to be only marginally higher than that in 2019- 20 (by around 2%) as per CARE Ratings economists.
Investments and Demands are yet to see a meaningful and durable pickup. Improvements in these are expected to be gradual and limited, given that even before the pandemic, the domestic economy was grappling with low demand and subdued investment climate.
Understanding GDP as National Income and its calculation : GDP is a widely considered and accepted measure of National Income. Generally it is defined as the money value of all productions of final goods and services in the country in one financial year, simply say what a country produces (capital goods/Infrastructure, consumer goods or services) in one year, is its income in one year. Theoretically this national income will be equal to national expenditure against all final goods and services, meaning whatever is produced will be bought (expenditure). Also whatever is produced is actually the income of somebody. For example if a pen is produced and sold for Rs 100. Rs 100 will be distributed among all stakeholders who were engaged in the making of the pen. Here the money value of production is equal to income of people engaged. At the same time somebody who buys the pen will do the expenditure of 100. Here to note that the value of production which is 100, is equal to income of people and also equal to expenditure of people.
In the same fashion a country’s national income (GDP) can be estimated through Income Method (by adding income of all individuals and organizations in the country), through Production Method (by adding value of all produced final goods and services) and through Expenditure Method (by adding all expenditure by private or government in buying final goods and services).
The National Statistical Office (NSO) while calculating National Income (GDP) through Final Expenditure Method adds Private Final Consumption Expenditure(PFCE), Government Final Consumption Expenditure (GFCE), Gross Fixed Capital Formation (expenditure against Infrastructure either by private or government, generally said as private investment and government investment), Change in Stocks, Valuables (like paintings, stone and jewellery etc.), Exports (added), Imports (subtracted as it is not produced inside the country), and adjusted with Discrepancies.