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GDP | Four things to watch out for Q1 numbers today

The Central Statistics Office will release gross domestic product (GDP) growth estimates for the first quarter (April-June) on August 31 at 5.30 pm.

August 31, 2020 / 12:11 PM IST
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How deep has been COVID-19's impact on the Indian economy? What has been the lockdown's effect on India's Gross Domestic Product (GDP) growth? How have the lockdown-induced disruptions affected businesses in India?

The national income statistics will offer cues on some of these questions.

How much lower than 0 percent?

There is no gainsaying the fact that Indian economy will contract in April-June this year. The debate is over the extent of the fall. Will the fall be sharper than (-) 10 percent? Will it be sharper than (-) 20 percent? ICRA, a credit rating agency and consulting firm, has projected that India's GDP would contract 25 percent in the April-June quarter.

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According to ICRA, that economic performance was primarily weighed down by the considerable drag imposed by three key production sub-sectors, namely manufacturing, construction, and trade, hotels, transport, communication and services related to broadcasting.

The State Bank of India's (SBI) research report Ecowrap has projected that India's GDP may contract by 16.5 per cent during the quarter due to lower-than-expected de-growth in corporate GVA (gross value added)

2. Farm-led rebound?

The agriculture sector, aided by plentiful summer rains this year, is expected to stand out as a beacon of hope.

Most analysts expect agriculture and allied activities to be the only segment that will turn in with a positive growth figure, helped by abundant monsoon rains, critical for the summer-sown kharif crop.

Besides, there has been big jump in government spending in rural areas that includes a Rs 40,000 crore jump in the annual NREGA Budget to 1 lakh crore, along with a slew of policy reforms through with the government has sought to dismantle many chronic distortions that have crept into India's agricultural markets.

In May, the government announced a grand plan to deal with India's protracted agrarian distress, including incentives for home delivery startups to aggregate products from farmers and setting up warehousing networks along highways, among others.

The government has set in motion plans to dismantle the decades-old monopolies of state-run Agriculture Produce Market Committees (APMCs), often blamed for unfair trading, amend the Essential Commodities Act (ECA) and frame an indicative price signalling system that a farmer can rely on at the time of sowing.

Most analysts expect a robust growth in the agriculture sector, but will it be strong enough to offset the damages in other segments, all of which appear to have fallen off a steep cliff?

3. PFCE and collapsing consumption

Gross Domestic Product or GDP represents the total value of all the final goods and services that are produced within a country's borders within a particular time period.

It can be calculated by using three methods — the supply or production method, the income method and the demand or expenditure method

One person's or entity's income is another person's spending on expenditure. For instance, what households spend in buying provisions at a local store is the shop owner's income. Likewise, an employee's salary is what his/her company spends.

Simply put, adding the earnings of all the people and the income of capital employed would give the GDP of the country.

The lockdown and the resultant fall in income should imply that people would have put off purchases on aspirational items such as cars and TV sets. A household's decision to buy a car or a consumer durable item such as television and refrigerator is not as much a function of current income as it is about expectations of future income.

A majority of Indian cars and relatively costly consumer durables are bought through loans. There appears to be a crisis of confidence brewing among households, who may be feeling uncertain about their ability to finance a purchase over a three to five-year period.

This should show up in the official statistics too. The key metric to watch out for would the private final consumption expenditure (PFCE) numbers, a realistic proxy to gauge household spending.

4. Nominal GDP and fiscal deficit

Nominal GDP is calculated at current prices. Real GDP is GDP adjusted for inflation. Economists, credit rating agencies as well as bond markets will keep a close eye on the nominal GDP numbers that CSO puts out.

While presenting the Budget for 2020-21 in February, the government had assumed that India's nominal GDP in FY20 will be Rs 204.42 lakh crore. Based on this, the government had pencilled in a 10 percent nominal GDP growth for 2020-21, estimating it to reach Rs 224.89 lakh crore.

The fiscal deficit — shorthand for government borrowing — of Rs 7.96 lakh crore (3.5 percent of GDP) was estimated based on these GDP calculations.

It is increasingly likely that these will now not clearly hold true. The government has already raised its borrowing target to Rs 12 lakh crore for this year. A lower nominal GDP of last year and a far lower-than-budgeted nominal GDP growth for 2020-21 will push up India's fiscal deficit, as a proportion of GDP, sharply.

This can have a bearing on bond markets as well as attract critical commentaries from sovereign credit rating agencies.

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first published: Aug 31, 2020 08:03 am