The National Statistical Office (NSO) will release GDP statistics for the quarter ending September today (November 27). There is near unanimity that they will mark a significant improvement from the massive 23.9% contraction seen in GDP figures for the quarter ending in June. The internal model of the Reserve Bank of India forecasts a GDP contraction of 8.6% in the September quarter. A recent research note by Pranjul Bhandari, HSBC Securities and Capital Markets chief India economist, expects the contraction to be 7.9%. However, the second quarter GDP figures are more than just the headline figures. Here are four things to keep in mind when looking at GDP figures.
India’s Relative Performance Against Other Major Countries
On March 24, India imposed one of the strictest lockdowns in the world to contain the spread of the Covid-19 pandemics. Economic activity was paralyzed for much of the April-June quarter. This caused a disproportionate drop in the GDP of India in this period. Data from the Organization for Economic Cooperation and Development (OECD) show that India’s GDP contraction was the steepest among all G20 countries. Most of the countries for which data are available for the September quarter have shown an improvement compared to the June quarter. China is the only G-20 country that has achieved growth in the June and September quarters. India’s economic recovery should be judged on the basis of its performance against other major economies rather than an improvement over the performance of the June quarter. This is even more important because India’s GDP had slowed even before the pandemic hit, meaning there could be a favorable base effect in this year’s figures.
Difference between nominal and real GDP growth
These are the latest GDP estimates before the budget. GDP figures for the December quarter will be released on February 26, at which point the Union Budget is likely to have been presented. Nominal GDP figures are important because they form the basis for revenue collection. The government has not made projections on the impact of the pandemic on revenues so far. This is not just a statistical question. There has been a demand for more fiscal stimulus in most sectors and the ability to do so will depend on the state of government revenue. The nominal growth figures will be interesting for one more reason. The post-lockdown phase has seen a rapid rise in retail inflation. Food inflation has risen to double digits in September and October. While inflation hurts the poor, it also generates tailwinds for government revenue collection. However, a look at the data above shows that periods of high retail inflation need not translate into periods of high nominal growth. This is because the composition of the consumer price index basket and the GDP deflator are very different.
The trajectory of investment demand
The consensus is that there has been a sequential (month-to-month) recovery in the Indian economy, but the jury is still out on how much is due to pent-up / festive demand. This is related to the question of the long-term damage that the pandemic has caused to the growth potential of the economy. The growth in investment demand in the September quarter will provide useful insight on this issue. If companies believe that a large part of the recovery is being driven by stifled demand due to supply disruption during shutdown or simply a peak in the holiday season, then they are unlikely to commit to new investment. Investment demand has contracted continuously since the quarter ending September 2019. An impressive recovery in investment demand would indicate optimism about the long- and medium-term outlook for the economy.
How important are today’s GDP figures to the rest of the fiscal year?
The large-scale economic disruption from the pandemic has caused a drastic change in the way economists track the economy. Because the GDP figures come with a significant lag, more frequent indicators are being used to get an idea of the latest state of economic activity.
Experts are already trying to project the state of the economy beyond the first half (April-September) of the current fiscal year. In a recent research note, Samiran Chakraborty, Chief Economist, India, at Citi Research, noted that a strong improvement in rural wages and a healthy Rabi harvest (winter) could soften the impact of lower government support in the second half. of the fiscal year. To be sure, he also expects a “decline in the sequential momentum of consumption in the second half of the fiscal year as the impact of stifled demand and forced saving diminishes.”
Another note from Pranjul Bhandari notes that t`HSBC’s recovery tracker eased somewhat compared to early November highs after a rapid surge in September and October, led in part by suppressed and festive demand.
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