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Q4 GDP estimates: Four things to watch out for

The Central Statistics Office will release GDP growth estimates for fourth quarter (January-March) and for FY 20 on May 29 at 5.30 pm.

May 29, 2020 / 09:46 AM IST

How has COVID-19 affected India's economy? What has been the lockdown's effect on the India’s gross domestic product (GDP) growth? How have the disruptions affected businesses in India? What happens when the government asks factories to shut down? What happens when the government asks construction activity to stop overnight? What happens when restaurants and shops are ordered to shutter down?

What has been the impact of this hard stop in the economy on India’s broader economy? How will India's GDP growth rate fall because of the Covid-19-related disruptions?  What are the chances of India’s GDP growth contracting and slipping into a full-blown recession?

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

The Central Statistics Office (CSO) will release gross domestic product (GDP) growth estimates for fourth quarter (Jan-March) and for FY 20 on May 29. Here are four things to watch out.

1. Closer to 0 percent?

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India's GDP grew 4.7 percent in October-December 2019 and 6.1 percent in FY19. ICRA has projected that India’s GDP will grow 1.9 percent in Q4 and 4.3 percent in FY20. Crisil has forecast that India's GDP will grow 0.5 percent in Q4 and 4 percent in FY20. SBI has pegged Q4 GDP growth at 1.2 percent and at 4.2 percent for FY20.

Analysts will be keenly watching the growth estimates India’s official statisticians put out. The closer the number is towards 0 percent, the greater the probability of India slipping into a recession, popularly defined as two successive quarters of contraction or negative GDP growth.

2. 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 or 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.

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

The lockdown and the resultant fall in income should imply that people would have put off purchases of aspirational items such as cars and televisions. A household's decision to buy a car or a consumer durable product such as television 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 appear 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 be the private final consumption expenditure (PFCE) numbers, a realistic proxy to gauge household spending.

3. GVA versus GDP

All eyes will be on the government's estimates of gross value added (GVA). GVA, which is GDP minus net taxes, serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the country. GVA growth has significantly fallen in the last few quarters, slipping to 4.5 percent in October-December, suggesting that the slowdown might be even sharper than what the headline GDP growth numbers suggest.

The lockdown that kicked in in the last week of March and the resultant slowdown in household spending and corporate investment may well be hiding in the steeper fall in GVA growth estimates compared to GDP.

Sluggish tax collections may also push GDP growth closer to GVA, mirroring a precarious state of government finances.

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 releases.

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 and may attract critical commentaries from sovereign credit rating agencies.

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Gaurav Choudhury
Gaurav Choudhury
first published: May 29, 2020 07:18 am