GDP to contract 7.7% in current fiscal, advance estimates show

First Advance Estimates of GDP (2020-21)

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In News: First Advance Estimates of GDP (2020-21)

  • The National Statistical Office (NSO) has released the First Advance Estimates (FAE) for the current financial year (2020-21).
  • According to NSO, India’s gross domestic product (GDP) — the total value of all final goods and services produced within the country in one financial year — will contract by 7.7 percent in 2020-21.
  • The real GDP in 2020-21 is likely to attain a level of ₹134.40 lakh crore, against the provisional GDP estimate for 2019-20 of ₹145.66 lakh crore.
  • The projected contraction reflects a loss of Rs 11.3 lakh crore of GDP in real absolute terms from last year.

First Advance Estimates of GDP:

  • For any financial year, the NSO provides regular estimates of GDP. The first such instance is through the First Advance Estimates (FAE), which is generally presented in January.
  • The Union Finance Ministry uses the FAE to decide the next financial year’s Budget allocations.
  • The FAE will be quickly updated as more information becomes available. On February 26th, NSO will come out with the Second Advance Estimates of GDP for the current year.

Calculation of FAE:
  • The FAE are derived by extrapolating the available data. Extrapolation is a process of estimating the values of a particular metric by assuming that existing trends will continue.
  • The sector-wise estimates are obtained by extrapolating the following indicators:
    • Index of Industrial Production (IIP) of first 7 months of the financial year.
    • Financial performance of listed companies in the private corporate sector available up to quarter ending September, 2020.
    • The 1st Advance Estimates of crop production.
    • The accounts of central & state governments.
    • Information on indicators like deposits & credits, passenger and freight earnings of railways, passengers and cargo handled by civil aviation, cargo handled at major sea ports, sales of commercial vehicles, etc., available for first 8 months of the financial year.

Break-up of the 2020-21 GDP numbers:

  • Following a 23.9% collapse in the economy between April to June 2020 period, the GDP fell by 7.5% in the second quarter – leading to a real GDP contraction of 15.7% in the first half of 2020-21.
  • It is estimated that the second half of the year will record near-zero growth or a mere 0.1% contraction, which would enable the Indian economy to end the year with a contraction of 7.7 percent.

Sector wise break up:

  • Out of a total eight sectors, agriculture and electricity generation are the only two sectors that are projected to have positive growth, with an estimated growth rate of 3.4 per cent and 2.7 per cent respectively.
  • The sharpest decline is expected in “trade, hotels, transport, communication and broadcasting services” at -21.4 per cent from a 3.6 per cent growth last year.
  • This is followed by 12.6 per cent contraction in the construction sector against a growth of 1.3 per cent last year.
  • Manufacturing will decline by 9.4 per cent in 2020-21 from 0.03 per cent growth last year, while mining is expected to contract by 12.4 per cent in 2020-21 from 12.4 per cent growth last year.

Key Takeaways:

  • There are various key takeaways from the First Advance Estimates as follows:
GDP Growth Rate:
  • India has registered an average annual GDP growth rate of 6.8 per cent since the start of economic liberalization in 1992-93.
  • Take in this context, the 7.7 per cent contraction in GDP is a very sharp contraction. Moreover, as table 1 shows, India’s GDP had already been declining over the past few years.
First Advance Estimates of GDP (2020-21)
Real GDP:
  • At Rs 134.4 lakh crore, India’s real GDP — that is, GDP without the influence of inflation — in 2020-21 will be lower than the 2018-19 level.
  • In other words, from the start of the next financial year, India would first have to raise its GDP back to the level it was at in 2019-20 (Rs 143.7 lakh crore).
First Advance Estimates of GDP (2020-21)
Per Capita GDP:
  • While the GDP provides an all-India aggregate, per capita GDP is a better variable to understand the impact on an average Indian.
  • As table 3 shows, India’s per capita GDP will fall to Rs 99,155 in 2020-21, which was last seen four years ago during 2016-17.
  • In fact, while the overall real GDP will fall by 7.7 per cent, per capita real GDP will fall by 8.7 per cent.
First Advance Estimates of GDP (2020-21)
Real Gross Value Added (or GVA):
  • The Gross Value Added gives an overview of the economy from the supply side.
  • It tracks the value-added by different sectors of the economy such as agriculture, industry and services. In other words, GVA provides an idea of the income earned by people involved in the various sectors.
  • As Table 4 shows, at Rs 123.4 lakh crore, India’s real GVA level, too, will fall below the 2018-19 level.
First Advance Estimates of GDP (2020-21)
Private Final Consumption Expenditure (PFCE):
  • The biggest demand for goods and services comes from private individuals trying to meet their consumption needs.
  • Typically, this includes all the things (from toothpastes to a cars) that people buy in their private individual capacity. This demand is called PFCE and it constitutes over 56 per cent of the total GDP.
  • As Table 5 shows, PFCE level in 2020-21 will almost fall to PFCE level in 2017-18.
First Advance Estimates of GDP (2020-21)
Per capita Private Final Consumption Expenditure (PFCE):
  • Just like per capita GDP, the per capita PFCE is also an important metric as it shows the expenditure of an average Indian in his/her private capacity. Generally, with rising income standards, such consumption levels also rise.
  • However, as Table 6 shows, at Rs 55,609, per capita PFCE will fall below the 2017-18 level.
Gross Fixed Capital Formation (GFCF):
  • The second biggest component of GDP is called GFCF and it measures all the expenditures on goods and services that businesses and firms make as they invest in their productive capacity.
  • If a firm buys computers and software to increase the overall productivity then it will be counted under GFCF.
  • This type of demand accounts for close to 28 per cent of India’s GDP. Taken together, private demand and business demand account for almost 85 per cent of the overall GDP.
  • As Table 7 shows, at Rs 37 lakh crore, GFCF (or the investment demand in the economy) has fallen even below 2016-17 level.

Future Outlook:

  • The Finance Ministry has said that improvements in various indicators in recent months highlight an improvement in the economic activity.
  • The relatively more manageable pandemic situation in the country as compared to advanced nations has given momentum to the economic recovery.
  • However, as per the RBI private investment is still slow and capacity utilisation has not fully recovered.
  • Demand for contact-intensive services is likely to remain low for some time due to social distancing norms and a tendency to avoid risk
  • The NSO has said the GDP estimates are likely to undergo “sharp revisions”, as the data collection for the macroeconomic indicators like IIP were impacted due to the pandemic.

Also Read: Steady dip in urban unemployment rate before lockdown, finds survey

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