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The Nuanced Story of India’s GDP Growth Rate: A Comprehensive Analysis
For representative purposes.
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The conventional way to assess a country’s economic situation is to look at the quarterly (three-month) and annual (12-month) GDP (gross-domestic-product) growth rate and compare it to previous quarters as well as years. In the quarterly release of GDP figures by the NSO (National Statistical Office), the country’s performance is likened to reviewing a report card of its economic performance. However, a critical difference between reviewing a report card and India’s economic figures is that the latter tells a far more nuanced story.
The Q1 data covering the GDP growth rate from April to June of FY24 boasts a nominal growth rate of 8% and a real growth rate of 7.8%. The growth story currently posits that the numbers reflect an uptick in the agriculture sector growing at 3.5%, unlikely to be sustained due to pressure from the El Niño phenomenon, and the services industry, with financial, real estate, and professional services growing at 12.2%. Moreover, there is also talk of sustaining a close to 6.5% growth rate for the current financial year. However, a closer look at the numbers provides a far more interesting interpretation of the growth.
Calculating GDP
The first factor to consider is that calculating the GDP growth rate involves many complex statistical choices and sophisticated statistical operations. One such decision the NSO made while conducting their research was to use the income approach of calculating GDP rather than the expenditure approach. The income approach involves summing up all national incomes from the factors of production and accounting for other elements such as taxes, depreciation, and net foreign factor income. The assumption generally is that both methods lead to similar results.
However, the expenditure approach dictates headline growth to be 4.5% rather than 7.8% which is a large discrepancy. Moreover, another essential statistical operation is the adjusting for inflation using the price deflator. Typically, the deflator is meant to adjust growth figures when they are overstated by inflation. In this case, deflation due to falling commodity prices, reflected in the wholesale price index, has worked to overstate the real growth. Furthermore, there is a base effect from the COVID-19 degrowth period, which continues to plague India’s growth figures. Although less pronounced in FY24, the base effect has a role in comparative statistics due to sporadic growth in the years following FY20-21.
Additionally, one must consider whether the proposed, supposedly cooled, inflation rate calculated through the consumer price index can be sustained at current levels with the impending depreciation of the Indian rupee against the dollar due to capital outflow pressures resulting from the RBI’s reluctance to raise interest rates. India is a net importer, and its most significant import consists of crude petroleum, whose price seems to be rising due to Saudi’s $100 per barrel push and rupee depreciation. The domestic consumption of diesel, a proxy for economic activity in India, fell by 3% in August, which, if sustained, does not paint a rosy growth picture for the coming quarters.
Revenue from taxes
Moreover, the government’s tax revenue from direct taxes has weakened over the previous quarter while the indirect tax revenue remained strong, indicating a K-shaped pattern. The income streams from progressive taxation (more significant tax burden on those higher on the income ladder) seem to be a laggard compared to its regressive counterpart. A muted growth of direct tax collected in an economy boosted by the services industry is a statistical discrepancy that remains unexplained in the proposed GDP growth story. Direct and personal taxes should (in the absence of any significant policy changes) have grown closer to the nominal growth rate than it has currently. Narrowing revenue streams indicate forced austerity measures, as the government intends to control the budget deficit, and hence the interest rate. Therefore, growth in FY24 stemming from government expenditure seems to be a pipe dream.
A nuanced approach
In conclusion, after a meticulous analysis of India’s Q1 FY24 economic transcript, it becomes palpable that the reported growth narrative might be somewhat overembellished. The divergence in growth figures brought forth by the income and expenditure approaches manifest a significant disparity, raising fundamental questions about the veracity of the promulgated optimistic narrative. Moreover, the underpinnings of this growth story, nuanced by inflationary adjustments and conspicuous fluctuations in tax revenue streams, signal a cautious trajectory. Additionally, the apprehensive outlook on the agriculture sector and potential fiscal constraints paint an arguably more restrained picture than initially portrayed. Therefore, it seems prudent to assert that India’s economic performance, although showing signs of resilience, does not quite emerge as the unequivocal success story depicted in initial observations, urging a more nuanced and critical approach in assessing the trajectory ahead.
Anand Srinivasan is a consultant and Sashwath Swaminathan is a research assistant at Aionion Investment Services
Significance of India’s GDP Growth Rate
India’s GDP growth rate is a crucial metric used to assess the country’s economic performance. It provides insights into the overall health and sustainability of the economy. The growth rate influences investor confidence, policy decisions, and public sentiment. Understanding the nuances of these figures is essential to make informed judgments and predictions about the future trajectory of the economy.
Key Features of India’s GDP Growth Rate
- The nominal growth rate for Q1 FY24 is reported at 8%, while the real growth rate stands at 7.8%.
- The growth is driven by the agriculture sector (3.5%) and the services industry, particularly financial, real estate, and professional services (12.2%).
- Growth figures are adjusted for inflation using the price deflator.
- The income approach is used for calculating GDP, taking into account factors like national incomes and taxes.
- The divergence between income and expenditure approaches results in significant disparities in growth figures.
Objectives and Effects of GDP Growth Rate
The primary objective of achieving a positive GDP growth rate is to ensure economic stability, improve living standards, and reduce unemployment. Sustainable and robust growth can lead to increased investment, higher incomes, and improved infrastructure. However, an overly optimistic or misrepresented growth narrative can result in misallocation of resources, policy misjudgments, and inaccurate economic forecasts.
Pros and Cons
Pros:
- Positive GDP growth rate reflects economic progress and potential for development.
- Increased growth can attract foreign investment and boost exports.
- Provides opportunities for job creation and poverty alleviation.
Cons:
- Overstated growth figures can lead to unrealistic expectations and misinformed policy decisions.
- Unequal distribution of growth benefits can exacerbate income inequality.
- Environmental implications of growth, such as increased carbon emissions, resource depletion, and ecological degradation.
Fun Fact
India is the world’s seventh-largest economy by nominal GDP and third-largest by purchasing power parity. Its GDP growth rate has been a topic of significant interest and debate among economists, policymakers, and investors due to its potential to drive global economic performance.
Mutiple Choice Questions
1. What is the conventional way to assess a country’s economic situation?
A) Analyzing the quarterly and annual GDP growth rates
B) Reviewing the report card of the country’s economic performance
C) Comparing the current GDP figures with previous quarters and years
D) All of the above
Explanation: The conventional way to assess a country’s economic situation is by looking at the quarterly and annual GDP growth rates and comparing them to previous quarters and years, similar to reviewing a report card of its economic performance.
2. What is the nominal growth rate of India’s GDP in Q1 of FY24?
A) 4.5%
B) 7.8%
C) 8%
D) 12.2%
Explanation: The nominal growth rate of India’s GDP in Q1 of FY24 is 8%.
3. Which sector of the Indian economy is unlikely to sustain its growth due to the El Niño phenomenon?
A) Agriculture sector
B) Services industry
C) Financial sector
D) Real estate sector
Explanation: The agriculture sector is unlikely to sustain its growth due to the pressure from the El Niño phenomenon.
4. Which approach did the NSO use to calculate India’s GDP growth rate?
A) Income approach
B) Expenditure approach
C) Both approaches
D) None of the above
Explanation: The NSO used the income approach to calculate India’s GDP growth rate.
5. What is the headline growth rate of India’s GDP according to the expenditure approach?
A) 4.5%
B) 7.8%
C) 8%
D) 12.2%
Explanation: According to the expenditure approach, the headline growth rate of India’s GDP is 4.5%.
6. What is the purpose of using the price deflator in adjusting growth figures?
A) To overstate the real growth
B) To adjust for inflation
C) To calculate the nominal growth rate
D) To calculate the GDP per capita
Explanation: The purpose of using the price deflator is to adjust growth figures when they are overstated by inflation.
7. What is the significance of the base effect on India’s growth figures?
A) It causes inflationary adjustments
B) It reflects the impact of the El Niño phenomenon
C) It is a result of falling commodity prices
D) It affects comparative statistics
Explanation: The base effect from the COVID-19 degrowth period has a role in comparative statistics due to sporadic growth in the years following FY20-21.
8. Why is the impending depreciation of the Indian rupee against the dollar a concern for India’s growth?
A) It leads to capital outflow pressures
B) It increases import costs
C) It affects the consumer price index
D) It causes a decline in direct tax revenue
Explanation: The impending depreciation of the Indian rupee against the dollar leads to capital outflow pressures and increases import costs, which can impact India’s growth.
9. Which sector serves as a proxy for economic activity in India?
A) Agriculture sector
B) Services industry
C) Financial sector
D) Crude petroleum sector
Explanation: The domestic consumption of diesel serves as a proxy for economic activity in India.
10. What does the weakening of direct tax revenue compared to indirect tax revenue indicate?
A) A progressive taxation system
B) A regressive taxation system
C) A K-shaped pattern
D) A decline in government expenditure
Explanation: The weakening of direct tax revenue compared to indirect tax revenue indicates a K-shaped pattern, where progressive taxation is lagging behind.
Brief Summary | UPSC – IAS
India’s reported GDP growth rate of 7.8% for Q1 of FY24 may be overstated due to various factors, including the use of the income approach instead of the expenditure approach, which would result in a lower growth rate of 4.5%. The adjustment for inflation using the price deflator has also worked to overstate real growth, and there is a base effect from the COVID-19 pandemic that continues to impact growth figures. In addition, there are concerns about sustaining low inflation rates and the impact of rising crude oil prices and a depreciating rupee. Furthermore, tax revenue streams indicate forced austerity measures and government expenditure may not contribute significantly to growth in the current financial year. Overall, a nuanced and critical approach is needed when assessing India’s economic trajectory.