The Crashing GDP

India’s GDP data for the first quarter of fiscal year 2021 came out last Monday and the GDP has contracted by 23.9%. What this means is, the GDP shrunk by around 24% between April-June 2020 as compared to the same period in the year 2019. India started to measure the quarterly GDP figures from the year 1996 and this is the first time that it has contracted. Also, this contraction has been the worst in any country.

Since it is a difficult task to measure the informal sector (which is why it is called informal in the first place), the data, therefore, doesn’t really show the reality of a sector which constitutes a major part in the Indian economy. NSO, in its press release also said that the Covid-19 has impacted the data collection mechanism, which is why these numbers aren’t perfect and the reality is worse than this.

Now, let’s come to how the GDP is calculated. Actually, there are two methods to calculate GDP of a country. One is to add the GVA of all the sectors and the second is by looking at the expenditure. I will tell you about the latter one as it is easy to understand. So the formula is: Y= C+I+G+NX, where Y is GDP, I is investment, G is government spending and NX is net exports (or exports minus imports).

 Simon Kuznet, who is popularly known as the father of this concept (of GDP) has argued that government spending should be kept out of this equation as the government can spend more and more even if it is unproductive, just to keep the GDP high, or as John Maynard Keynes said, “Dig ditches and fill them.” Therefore, if we keep the government spending out of the equation, then our GDP contraction comes out to be 29%.

A similar case happened with net exports this time around. Usually the net export in India’s case is a negative number as India’s exports are lower than imports, but during this quarter, India’s imports crashed far more than the exports did, thus making the net exports a positive number. Well, this imports crash is not at all a good sign. Non gold non silver non oil imports, which are an excellent indicator of consumer demand, are down by 41%, which clearly tells us that consumers are not willing to spend.

The above two are the points which have had a negative impact on the Indian economy, but have increased the GDP. That’s why, sometimes GDP is not a correct way to measure the development.

I also think that this 24% contraction is not the fault of central government. While I believe that this government has committed tremendous mistakes while handling the economy or the whole country for that matter, but this time the contraction was because of the lockdown that was imposed. According to the stringency index of Oxford, India’s lockdown was marked 100 out of 100 for the first one or one and half months. If it had not been imposed, then we would have faced more cases till now, and if it had been extended, then the contraction would have been far more. On the contrary, it is the fault of this government that our economy didn’t do well in the last few years and it is the fault of this government that we could not manage the rising Covid-19 cases. Nevertheless, we would have still managed to achieve a little dip in the GDP, if not this much, even when there were no Covid-19 pandemic, considering the effects of a devastating Demonetisation and a poorly implemented GST.

Next year, the same time around, there would be an upsurge in the social media with people and ministers saying that the economy is back on track as the GDP figures will most probably show a double digit growth. Yes, you read that correctly, a DOUBLE DIGIT growth! Now the readers would wonder how is that possible that we will shoot up from a negative growth to a double digit growth? I am telling you this right now as no one would care to read it then. Actually, the answer lies in the way we take out the GDP. As I told you earlier, we calculate it on a Year on Year basis. What that means is, we compare the GDP of a particular quarter with the same quarter of previous year and then take out the growth percentage. We witnessed a record breaking -24% growth in this quarter, so it is but obvious that when the restrictions are completely over the next year, we would achieve a massive growth rate as compared to this year. But that doesn’t necessarily mean we have done something extraordinary. Vivek kaul, as you would know, whom I follow a lot, did some basic calculations and found out that even if we achieve a growth rate of 11.5% in Q1 next year (i.e. April-June 2021),  our GDP will still be where it was in April-June 2016, if we grew by 15.2%, our GDP will still be where it was in April-June 2017, same way, by 26.4% growth we will be where we were in April-June 2018 and by 30.1% growth rate we will still be where we were in April-June 2019. So we are two years behind even in the most optimistic scenario. As I said, GDP is flawed sometimes, but the bad part is, we all will buy into the same story in future.

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