Expert Speak India Matters
Published on Jul 16, 2021 Updated 12 Days ago
Provisional 2020-21 GDP estimates confirm continuing depressed consumer demand

Economic recovery needs a certain amount of optimism across all sectors of the economy. Important economic players, who will determine the course of recovery, should be moderately optimistic. But optimism also needs to be supported by real-time data and statistical facts.

Unfortunately, for the Indian economy at this juncture, persistent and depressed consumer and investment demand have hindered such a build-up of optimism towards recovery.

A sense of recovery optimism has been conjured when provisional estimates (PE) projected the gross domestic product (GDP) growth rate to be –7.3 percent in 2020-21 (Figure 1). This is, indeed, a better growth rate projection than what was anticipated a year back.

A sense of recovery optimism has been conjured when provisional estimates (PE) projected the gross domestic product (GDP) growth rate to be –7.3 percent in 2020-21.

However, the press release of the National Statistical Office under the Ministry of Statistics and Programme Implementation (MoSPI) says, “The limitations in the datasets and the timeliness have a bearing on the GDP estimates and its subsequent revisions… Estimates are, therefore, likely to undergo sharp revisions in due course”. This is an important caveat to remember.

FIGURE 1: Trends in growth rates of components of annual GDP at constant prices (2011-12) in last three fiscal years (in percentage)
* Growth rates are calculated using 2017-18 (3rd RE), 2018-19 (2nd RE), 2019-20 (1st RE) and 2020-21 (PE) data * RE = Revised Estimates, PE = Provisional Estimates * GFCE = Government Final Consumption Expenditure, PFCE = Private Final Consumption Expenditure, GFCF = Gross Fixed Capital Formation, GDP = Gross Domestic Product Data Source: Ministry of Statistics and Programme Implementation (MoSPI), Government of India

If annual GDP growth rate remains below a negative double-digit figure for 2020-21 in subsequent revisions, then it will definitely be a small achievement—given the havoc created by the pandemic. But even that feat would not be able to compensate for the fact that two major demand components—consumer and investment demands (PFCE and GFCF)—suffered negative year-on-year growth rates of –9.1 percent and –10.8 percent respectively (Figure 1). Compared to 2018-19, growth rates in both these components had shrunk in 2019-20. So, the demand deficiency in the economic system is acute—to say the least.

If annual GDP growth rate remains below a negative double-digit figure for 2020-21 in subsequent revisions, then it will definitely be a small achievement—given the havoc created by the pandemic.

Government final consumption expenditure (GFCE) is the only component of GDP that clocked a positive annual growth rate at 2.9 percent (Figure 1). In the fourth quarter (Q4) of 2020-21, the growth rate of GFCE is a huge at 28.3 percent (Figure 2). But in the previous two quarters, the rates were in the negative. This simply implies that government expenditure cannot keep on propping the economy up. Main components of consumer demand and investment demand have to go up subsequently.

FIGURE 2: Trends in growth rates of components of quarterly estimates of GDP at constant prices (2011-12) in the year 2020-21 (in percentage)
* Year-on-year growth rates are calculated, compared to previous year’s same quarter figures. * GFCE = Government Final Consumption Expenditure, PFCE = Private Final Consumption Expenditure, GFCF = Gross Fixed Capital Formation, GDP = Gross Domestic Product Data Source: Ministry of Statistics and Programme Implementation (MoSPI), Government of India

Quarter-wise growth trends in 2020-21 indicate that in Q4, consumer demand has not improved as much as expected (Figure 2). In comparison, investment (GFCF) grew substantially in Q4. However, the GFCF estimates have been compiled using the commodity flow approach, and government’s capital expenditures will be indirectly reflected in those estimates.

Commodity flow approach uses final expenditures for estimation. In this method, simpler form of the supply and use of tables with much less up-to-date information are utilised to estimate growth. So, data on intermediate and final consumptions, and thereafter, information on value added may not be accurate in this method. So, the healthy GFCF growth in Q4 should be interpreted with caution as future revisions are quite likely.

Trends in sectoral quarterly growth rates in 2020-21 are no different. Only agriculture, forestry, and fishing showed consistent positive growth rates across all quarters. Optimistic signals can be found in sectors like construction and manufacturing. However, there are deep disappointments in sectors like mining, trade, hotels, transport, communication, and broadcasting services. Tourism and transport slowdown were expected, but the mining sector’s bad performance along with a positive Q3 and Q4 growth rate for manufacturing is a bit baffling (Figure 3).

Though it is too early to spot any concrete trend, a slight fall in growth rate of financial, real estate and professional services in Q4 may be a worrying factor in the future. Financial sectors, particularly the banking sector, have not been closed even during the most stringent lockdown period. That is why the banking sector performed better than others. But if other sectors experience frequent disruptions, then it may be a matter of time before the banking and other financial sectors also get affected adversely. As mentioned, it is premature to come to such a conclusion right now, but a drop in the financial sector growth rate should be closely monitored.

If other sectors experience frequent disruptions, then it may be a matter of time before the banking and other financial sectors also get affected adversely.

Quarterly estimates are also derived through a lot of extrapolation, and naturally are subject to future revisions. But current estimates indicate that a good amount of pent-up demand in construction, real estate, and some parts of manufacturing led the rally in the last two quarters of the fiscal year 2020-21 (Figure 3).

FIGURE 3: Trends in growth rates of quarterly estimates of sectoral GVAs at constant prices (2011-12) in the year 2020-21 (in percentage)
* GVA = Gross value added Data Source: Ministry of Statistics and Programme Implementation (MoSPI), Government of India

Data collection and compilation have suffered in a big way due to the pandemic-induced disruptions. So, estimation of GDP has turned into a difficult job. Even in this inaccurate time for estimation, it is now quite clear that consumer demand remained depressed throughout the last fiscal year.

When people frequently losing livelihood opportunities due to economic disruptions and health-related fatalities becomes a “new normal”, then compensating that loss of income/purchasing power by some other ways is the only way forward in the short run. Moving in that direction is the only way that can keep the economy and people alive in the long run.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

Contributor

Abhijit Mukhopadhyay

Abhijit Mukhopadhyay

Abhijit was Senior Fellow with ORFs Economy and Growth Programme. His main areas of research include macroeconomics and public policy with core research areas in ...

Read More +