Five main takeaways from the Q2 GDP data

#GS3 #ECONOMY

The soundness of the Finance Ministry’s assessment of India’s nominal GDP growth rate is central to the credibility of the forthcoming Budget numbers.

  • According to the official data released last Friday, India’s gross domestic product(GDP) contracted by 7.5% during the July, August, and September quarter. This means in Q2 of 2020-21 India produced 7.5% fewer goods and services when compared to what India produced in Q2 of 2019-20.
  • In the process, India’s economy has now formally entered into a technical recession because — along with the nearly 24% contraction in Q1 — India has had two consecutive quarters when GDP growth rate has declined.
  • However, the 7.5% decline data has been met with all-round cheers. That is counter-intuitive but not without justification. For one, the 7.5% figure is decidedly lower than most street estimates.
  • The second takeaway is that economic recovery is fairly broad-based. To understand this one must look at the Gross Value Added (GVA) data instead of GDP data. The GVA data provides a measure of national income by looking at the value-added by different sectors of the economy in that quarter. If you want to compare which parts of the economy improved production and incomes from one quarter to another, the GVA is more apt.
  • The third takeaway is in the form of a caveat. The most surprising aspect of Q2 data is the positive growth — albeit a meagre 0.6% — registered by India’s manufacturing industry. Part of this can be explained by a weak base — check out the minus 0.6% in Q2 of 2019-20.
  • Speaking of lack of demand brings us to the fourth takeaway. If we turn over to the GDP data (see Statement 2) — which measures national income from the perspective of who demanded (spent) how much in a particular quarter — we find that all engines of growth were performing far below normal.
  • However, the Q2 GDP data — which is the last such release before the Union Budget is presented on February 1 — points to a trend where India will most probably witness positive growth rate in “nominal” GDP as early as the third quarter, which is currently underway. That brings us to the fifth key takeaway from this round of GDP data: The importance of nominal GDP especially from the point of view of India’s forth coming Budget.
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