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How to read Q2 GDP data

GS Paper 3

Syllabus: Indian economy and related issues

 

Source: IE

 Direction: This is an explained article from the Indian Express. The article explains basic concepts of the economy like GDP, GVA and their relationship.

  

Context: The Ministry of Statistics and Programme Implementation released India’s economic growth data for the second quarter (July-Sept – Q2) of the current fiscal year (FY 2022-23).

 

Key highlights of the data:

  • India’s gross domestic product (GDP) grew by3% year on year in Q2, slower than in 2021.
  • The gross value added (GVA) has grown by 6% year on year in Q2, against 8.3% in 2021.
  • Output growth in India’s 8 core sectors (Electricity, Steel, Refinery products, Crude oil, Coal, Cement, Natural gas, and Fertilisers) slowed drastically to 0.1% in October 2022, down from 7.8% the previous month.

 

Key economic concepts and how recent data shows them:

 GDP:

  • It is a monetary measure of all final products and services produced in a country over a certain period.
  • It measures national income by calculating the economy’s overall “demand.”
  • 4 key engines of GDP growth: The GDP is calculated by adding total expenditures in the economy with respect to –
    • Private Final Consumption Expenditure (PFCE): The biggest engine of growth, which contributes over 55% of India’s total GDP.
    • Government Final Consumption Expenditure (GFCE): Just 10-11% of GDP.
    • Gross Fixed Capital Expenditure: 33% of the total
    • Net Exports (Exports minus imports)

  

GVA: It derives the same national income from the supply side by summing up all the value added (the value of output minus the value of its intermediary inputs) across various sectors.

 Relationship between GDP and GVA:

  • GDP = (GVA) + (Taxes earned by the government) — (Subsidies provided by the government).
    • If taxes exceed the subsidies provided, GDP will be higher than GVA. For example, for Q2, the GDP (at Rs 38,16,578 crore) is much higher than the GVA (which is at Rs 35,05,599 crore).
  • By examining GVA growth, one may determine which sectors of the economy are doing well and which are struggling.
  • Though GDP is produced from GVA data, GDP data is more relevant when looking at annual economic growth and comparing a country’s growth to that of the past or another country.

 

Takeaways from the recently released data:

  • Since the pandemic, the economy has recovered, but the manufacturing sector’s contraction (by 4.3%) has put doubt on future demand, as the sector has a great potential for job creation and can absorb excess farm labour.
  • Agriculture (together with forestry and fishing) has performed better than projected, rising at a 4.6% annual rate.
  • Private consumption expenditure is the most important driver of GDP growth, incentivizing businesses to make new investments.
  • The biggest surprise is the decrease in government final consumption expenditures, which can boost an economy when consumers and businesses reduce spending.

 

Future challenges: Higher interest rates and no significant increase in demand, along with a slowing global economy, may create challenges in the current fiscal year.

 

Insta Links:

Whose GDP is it anyway?

  

Mains Links:

Q. What is Gross Domestic Product (GDP)? Examine the limitations pertaining to GDP as an economic performance measurement framework of the country. (250 words)

  

Prelims Links:

Consider the following statements:

  1. Nominal GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices.
  2. If the Real GDP changes, it implies that the volume of production is undergoing changes.
  3. The ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year to the current year.

Which of the above statements is/are correct?

a) 1, 2

b) 1, 3

c) 2, 3

d) 1, 2, 3

Solution: c)

  • In order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points in time, we cannot rely on GDPs evaluated at current market prices. For comparison, we take the help of real GDP. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).
  • Since these prices remain fixed, if the Real GDP changes, we can be sure that it is the volume of production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.
  • Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year.
  • The ratio of nominal to real GDP is a well-known index of prices. This is called GDP Deflator.