India is not the fastest growing big economy

News: Recently, the Provisional Estimates of Annual National Income in 2021-22 was released. It showed that India’s GDP grew 8.7% in real terms and 19.5% in nominal terms (including inflation) which made India the fastest growing major economy in the world.

What are the problematic areas in the present GDP estimation?

As per data, Indian GDP has registered no growth since the pre-pandemic year. India has just recovered the level of GDP that was before the pandemic. It was impacted by the COVID-19 lockdown, supply disruptions following the war in Ukraine and the severe COVID-19 lockdown in China.

It also means India has been facing high inflation.

What are the underlying causes for the above-mentioned problem?

There is an issue in correctness of data used in quarterly estimates since very limited data are available for estimating it.  The reasons are

(1) During 2020-21, full data could not be collected due to the pandemic induced lockdown and other measures.

(2) Agriculture is a part of the unorganised sector. Very little data is available for its assessment.

(3) The limited data available for the organised sector is used as a proxy for the non-agriculture unorganised sector. This method may have been acceptable before demonetisation (2016), however, the unorganised non-agriculture sector has suffered far more than the organised sector during the waves of the pandemic.

At present, the data used remains largely unchanged. This implies that the same error is being carried forward. It means the errors made in the quarterly data are repeated in the annual data.

If GDP data are incorrect, data used on its components like private consumption and investment are also incorrect.

– For example, according to the RBI, consumer confidence throughout 2021-22 was way below its pre-pandemic level. So, consumption could not have come close to its pre-pandemic level.

What is the possible correction in the provisional estimate?

The GDP for 2021-22 has grown by only 1.8%, and not 8.7%. Further, It would be less than the pre-pandemic GDP of 2019-20 by 4.92%. It is because the organised sector and agriculture are growing at the official rate of growth of 8.2% and 3%, respectively. However, the non-agriculture unorganised component has been declining due to the closure of units and the shift in demand to the organised sector.

Way Forward

Clearly, recovery is incomplete and India is not the fastest growing big economy of the world.

Source: The post is based on an article “India is not the fastest growing big economy” published in the “The Hindu” on 11^th June 2022.