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GDP numbers show economy back at pre COVID size but deep pain in lower rungs

economy | Jan 9, 2022 8:41 AM IST

GDP numbers show economy back at pre-COVID size but deep pain in lower rungs

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The real GDP growth of the current year has been estimated at 9.2 percent which is a tad lower than the RBI’s estimate of 9.5 percent.

The first advance estimates of GDP, always announced three weeks before the Budget, are an important first step in the building of the Budget numbers. These estimates inform the government what is the base output on which to make growth assumptions for next year. The tax and fiscal deficit assumptions are in turn based on the GDP growth assumptions.

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The real GDP growth of the current year has been estimated at 9.2 percent which is a tad lower than the RBI’s estimate of 9.5 percent. Here are some other takeaways from the numbers - mostly somber ones:
1.
Firstly, the real GDP as of March 21 this year will be at Rs 147 trillion, just a shade above the 2-years ago level of Rs 145 trillion, the GDP output as of March 31, 2020. That's two full years of growth lost.
2. Secondly the per-capita income as of March this year will be at Rs 1.07 lakh, versus Rs 1.08 lakh two years ago. The average Indian is thus poorer off.
3. The real GDP (ie GDP at 2011-12 prices) grew at 9.2 percent to Rs 147 trillion, but nominal GDP, ie (real GDP + inflation) grew by 17.6 percent. At current prices, nominal GDP has grown from Rs 197 trillion to Rs 232.15 trillion. The Feburary'21 budget had estimated the nominal GDP to grow to Rs 222.87 trillion, ie by 14.4 percent (approximately 9.5-10 percent real growth plus 4.5-5 percent inflation). The nominal GDP thus has come in almost Rs 10 trillion higher, but that is almost entirely due to price rise.
4. Whether it is because of inflation or output growth, the fact that the nominal GDP is almost Rs 10 trillion higher than the Budget estimate of Rs 222.87 trillion, implies the government has more fiscal space. Since the fiscal deficit for this year is fixed at 6.8 percent of the nominal GDP, the additional Rs 10 trillion GDP allows the government to spend Rs 65,000 crore more this year.
5. That GDP has grown largely because of the formal, richer India is incontestable. The earnings of the Nifty 50 companies are set to rise by 35 percent this year. Corporate taxes have grown by over 50 percent this year versus the level two years ago, indicating a compounded annual growth of 24 percent per annum in the past two years. If GDP for the country is flat from two-year ago levels, but corporate profits have risen over 50 percent in 2 years, it stands to reason that there has been a decisive shift of resources from the bottom of the pyramid to the top.
6. For the lower rungs of the economy, the fact that inflation (as measured by the GDP deflator) has come in at 8 percent, implies even more impoverishment.
7. GDP data show that personal final consumption grew by 6.8 percent this year after a cut of 9.1 percent last year. This means consumption has not been able to climb back to even pre-Covid levels. On the other hand gross, fixed capital formation has grown at 15 percent, from a cut of 10.8 percent in Fy21. That's good news, but can one expect capex to grow at this pace if consumption doesn’t pick up!
8. Even before the GDP data came in, the advance numbers for the Oct-Dec quarter, that corporate India has been declaring, show a clear slowdown in rural consumption. HUL pointed this out even after their Q2 results, but in Q3, whether it is tractors or two-wheelers, or even FMCG product volumes, the numbers are reiterating the persistence of rural consumption slowdown. In sharp contrast, high-value consumption, represented by companies like Titan and Asian Paints have shown excellent volume growth in Q3.
9. The lesson for the Budget appears to be clear: that something needs to do to bolster consumption in the lower echelons. The political dispensation has to decide whether this should be through income transfers like the PMGKY, through higher MNREGS wages, or by a cut in fuel taxes which can push down inflation across the board.
10. Finally, can the Budget assume another 17 percent nominal GDP growth and the tax buoyancy that was in evidence this year. Unfortunately no. The 9.2 percent real GDP of this year, the 17.6 percent nominal GDP growth, and the 35 percent earnings growth came off a terrible base. Assumptions for next year have to be more restrained than this year's actuals. This will make the task of redistribution more formidable.
NSO’s FIRST ADVANCE EST OF FY22 GDP
FY22EFY21A
Agri3.93.6
Mfg12.5-7.2
Elec, Gas8.51.9
Construction10.7-8.6
Trade, hotels, Trans11.9-18.2
Fin, real estate4-1.5
Admn, Defence, Services10.7-4.6
 
NSO’s FIRST ADVANCE EST OF FY22 GDP
FY22EFY21A
Pvt Final Consumptn6.8-9.1
Govt Fin Consmpn7.62.9
Gross Fixed Cap For15-10.8
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