E-Paper
What is 'base effect' and how it could contribute to India’s fastest GDP growth
The Reserve Bank of India and the National Statistical Office has projected the Indian economy to contract 7.5 per cent and 7.7 per cent respectively in 2020-21.
The Economic Survey expects India to grow by 11 per cent during the fiscal year beginning April 1, close to what the International Monetary Fund (IMF) had predicted a few days earlier. Chief economic adviser KV Subramanian, also the lead author of the survey, told news agency PTI that the country would witness the revival of “animal spirits” of private enterprises.
The Reserve Bank of India (RBI) and the National Statistical Office (NSO) has projected the Indian economy to contract 7.5 per cent and 7.7 per cent respectively in 2020-21. This means that the expected growth of 11 per cent in the next financial year will help the economy stage a “V-shaped” recovery. An 11 per cent growth will be the fastest the Indian economy has ever grown, however, it will be partly due to the base effect.
What is base effect?
According to Investopedia, the base effect is the distortion in a “monthly inflation figure that results from abnormally high or low levels of inflation in the year-ago month”. The expected contraction of 7.7 per cent during 2020-21 will shrink India’s Gross Domestic Product (GDP) to ₹134.4 lakh crore and the projected growth of 11 per cent will be on this lower base.
Read | Key numbers, ideas in the Economic Survey
In 2019-20, India’s GDP was at ₹145.7 lakh crore and the 11 per cent growth on the lower base of ₹134.4 lakh crore will take the GDP to ₹149.2 lakh crore. This means the GDP will be just 2.4% more than where it was in 2019-20 and the 11 per cent growth will be partly due to the abnormal contraction in the current fiscal year owing to the coronavirus pandemic. That’s how the base effect will play its part in the expected growth.
Meanwhile, noted economist Arun Kumar has claimed that the Indian economy is not recovering as fast as projected by the government. Kumar told PTI that the economy may contract 25 per cent in the current financial year as opposed to 7.7 per cent contraction projected by the NSO. The former professor at Jawaharlal Nehru University (JNU) pointed out that the government's own document had said there will be a revision in the data later on. If the data get revised as suggested by Kumar, the base will be even lower than the current projection and the country could witness even higher growth due to the base effect.
