Why GDP data matters and key indicators to look for
The National Statistical Office (NSO) will release the GDP numbers for the April-June quarter of the current financial year on Monday and there is a wide consensus among economists that the data will reflect an economic contraction.
To be sure, the estimates vary. SBI’ Ecowrap research expects a 16.5% contraction in the first quarter. A research note by Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets India Pvt. Ltd, expects a 17.5% contraction. Pranab Sen, India’s former chief statistician, expected the economy to contract between 12% and 40% in an earlier comment to HT (see https://bit.ly/34PFsTV). And a Bloomberg poll of 15 economists, put the contraction at 19.2%.
Here are three things to keep in mind while reading the data.
Monday’s “first estimates” could see further downward revisions: India’s GDP calculation methodology uses formal sector activity as a proxy for informal sector activity while calculating the first estimates. A research note by Pranjul Bhandari says that because the pandemic has affected the informal sector more than the formal sector, and given the lower shock absorption capacity of firms in the former, the initial numbers could overestimate economic activity in manufacturing and services. Once the informal sector numbers are available, the 17.5% contraction could increase to as much as 25%, she adds.
What is happening to nominal growth rate: While the real growth rate is expected to remain in contraction zone not just in the first quarter but also the full financial year, today’s release will give an idea about the hit to nominal growth. Because the consumer price index and wholesale price index have been diverging, there is a lack of clarity on this count at the moment. Nominal growth numbers matter significantly for revenue collections. Taxes, after all, are a fraction of nominal incomes. Nominal GDP growth plummeted to 7.2% in 2019-20, the lowest since 1975-76. A disproportionate fall in nominal growth, and its adverse effect on revenue collection, will make it more difficult for the government to boost economic activity. This will also worsen the already growing tension between the Centre and the states, given the ongoing controversy around the payment of Goods and Services Tax compensation.
Sector-wise pain of the pandemic’s disruption: Monday’s GDP numbers will not be the first indicators of economic activity during this period, as there are other high-frequency indicators such as the Purchasing Managers’ Indices, the Index of Industrial Production and the performance of core sector industries. However, the Gross Value Added (GVA) numbers will give a detailed estimate of sector-wise performance of the economy. This, when read with respective employment shares, will tell us the extent of pain that India’s 400 million-plus workforce suffered during the lockdown. For example, construction had a share of 8% in GVA in 2018-19, but its employment share, according to the 2018-19 Periodic Labour Force Survey was 12.1%. A larger contraction in the employment-intensive non-farm sector will mean that the economic pain of the pandemic has been more widespread.