Overestimate GDP growth data

Context- The higher GDP growth rate of the economy actually masks the decline in the unorganized sector.

What in the news-

The second quarter GDP contracted at a slower pace of 7.5 per cent compared to a massive 23.9 per cent in the first quarter of the current fiscal.

• The economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated.

Why GDP data should not be taken as sustainable recovery?

1. The source of information is not reliable– Very little up-to-date primary information from factories and offices is available for the estimation.

• The data usually used to project quarterly growth rates were not available and so “some other data sources” were used.
• The method of calculation of quarterly growth rates is inaccurate.It was implicit in the method of estimation that this component could be proxied by the data from the organized sectors of the economy.

2. Pent up demand- The healthy recovery in the second quarter represents meeting the pent-up demand after the ‘Unlock’ phase started in June.

How the proportionality between the unorganized and organized sectors disrupted?

1. Due to demonetization– The cash shortage impacted unorganized sectors far more than the organized sector.

• The non-agriculture unorganized sector was disproportionately impacted by demonetization, as this sector consists of tiny units that work with cash.

2. Implementation of the GST-The GST system favoured the organized sector, and demand shifted from the unorganized sector to the organized sector.

Why quarterly growth numbers are not robust?

1. Collected data limited to organized sector only.

• The growth of the economy has been much less than that what is implied by the official GDP numbers.
• While trade has declined, data will indicate growth since it is available only from e-commerce and big stores [organized sector].
• If the data are taken only from the larger units, the decline of 20% to 30% will not be captured.
• Not all data are collected– The organized sector was able to restart business but not the unorganized sector due to low demand for the produce of unorganized sectors

Way forward-

• The quarterly growth numbers are not robust.
• It is difficult to predict that weather the economy is recovering or not, as the collected data was non comparable.