India is not the fastest growing large economy

Provisional Estimates of Annual National Income in 2021-22 just released show that GDP grew 8.7% In real terms and 19.5% in nominal terms (including inflation). This makes India the fastest growing major economy in the world. Moreover, the real economy is 1.51% bigger than in 2019-20, just before the novel coronavirus pandemic hit the world. In nominal terms, it is higher by 17.9%. These figures mean that the inflation rate was 10.8% in 2021-22 and 16.4% between the two years, 2019-20 and 2021-22.

quarterly growth rate

This picture indicates almost no growth and high inflation since the pre-pandemic year. So, the tag of fastest growing economy is very less. If an economy falls rapidly and then rises just as rapidly to reach its earlier levels, it cannot be taken as a sign of a rapidly growing economy.

Quarterly growth at present may give some indication of the current rate of growth. In 2020-21, the quarterly rate of growth increased during the year. The growth rate has been slow in 2021-22. Of course in 2020-21, the COVID-19 lockdown had a severe impact in Q1 (-23.8%); After that the rate of growth accelerated. In 2021-22, the growth rate was to accelerate (20.3%) in Q1. Ignoring the outliers in Q1, the growth rate in 2021-22 has eased sequentially in the subsequent quarters: 8.4%, 5.4% and 4.1%. True, the figures for the last quarter (January-March 2022) were affected by the lockdowns related to Omicron in January and February. It was further hit by supply disruptions in March following the war in Ukraine and severe COVID-19 lockdowns in China. Going forward, while the lockdown ends in China, the war-related effects are likely to continue as there is no end to it. Thus, the effect on price rise and production is likely to persist. The rapid rise in prices will have an impact on the demand of most of the citizens who are losing out. This will further reduce growth.

data as problem

Even more worrying is that the issue is about the accuracy of the data. The annual estimates given now are provisional as complete data for 2021-22 is not available. They may outperform the second advance estimates released three months ago as more data becomes available. There is a major problem with quarterly estimates because there is very limited data available to make estimates. Therefore, the now released figures for the fourth quarter of 2021-22 are even more problematic.

The first issue is that during 2020-21, due to the pandemic, the complete data for Q1 could not be collected. Furthermore, the quarterly data for agriculture assumes that the targets have been achieved. But in Q1, a lot of fruits, vegetables, flowers, milk and poultry products could not hit the market, and got rotten and wasted. It accounts for more than 50% of agricultural production. Thus, the growth rate of agriculture was certainly less than the official figure of 3%.

Agriculture is a part of the unorganized sector. There is very little data available for this but for agriculture – neither for the quarter nor for the year. It is only assumed that the limited data available to the organized sector can be used to act as a proxy. In other words the non-farm unorganized sector is represented by the organized sector. Full organized sector data are also not available so ‘high frequency’ data (listed in the press note) are used. For example, Goods and Services Tax (GST) collection data is used. But, it is well known that GST is collected almost entirely from the organized sector. In short: there is very little data available for quarterly estimates; And even less is available for the unorganized sector. Since the same method is used to estimate the annual growth rate, the errors are repeated.

Total Errors, Components

If better data becomes available, and is used, after the shock of the lockdown, there should be substantial revision in the quarterly figures for the previous year. But if one compares the data for Q1 2020-21 in the latest release with the data released in May 2021, the change is 0.3%. Does this mean that the high frequency data used is very capable of predicting quarterly GDP? This is unlikely to happen when the economy is given a blow that changes the parameters of the economy. Data remaining largely unchanged implies that the same error is being carried forward.

Quarterly data is added to get the annual total. If a better method was used to estimate the annual data, it should not be equal to the sum of the quarterly data, as argued above, estimated based on a limited data set. The implication is that errors in quarterly figures are repeated in annual figures.

The method of using the organized sector to proxy the unorganized non-farm sector may have been acceptable before demonetisation (2016), but has not been perfect since then. This is because the unorganized non-farm sector suffered much more and more losses than the organized sector during the waves of the pandemic. Large sections of the unorganized non-farm sector have experienced a change in demand as they produce similar things. This introduces large errors in GDP estimates because official agencies do not anticipate this change. It is all known that the Micro, Small and Medium Enterprises (MSME) sector has faced closures and failures.

If GDP data is wrong, then the data on its components – private consumption and investment – ​​must also be wrong. Often, ratios are applied to GDP to estimate them. But, if the GDP is flawed, the ratio will give wrong results. The other core components – government and external business – can be considered reasonably accurate, even if this data is revised over many years.

Moreover, the ratio itself would have been affected by the shock of the lockdown and the decline of the unorganized sector. Additionally, private consumption figures are questionable because according to data provided by the Reserve Bank of India, which largely captures the organized sector, consumer confidence during 2021-22 is at its pre-pandemic level of 104 achieved in January. was below (not marginally less). 2020 Therefore, consumption could not have come close to its pre-pandemic levels.

In short, neither the total nor the ratio are correct. Clearly, consumption and investment figures are overestimated and are highly likely because the decline has not been captured in the unorganized sector.

possible improvements

In the best possible scenario, assume that the organized sector (55% of GDP) and agriculture (14% of GDP) are growing at official growth rates of 8.2% and 3%, respectively. Again, they would contribute 4.93% to GDP growth. The non-farm unorganized component is declining due to two reasons: first, the closure of units and second, a change in demand for the organized sector. Even if 5% of units closed this year and 5% of demand shifted to the organized sector, the unorganized sector would have declined by about 10%; The contribution of this component to GDP growth would be -3.1%.

Based on the above assumptions, GDP for 2021-22 would have grown by only 1.8%, not 8.7%, and would be 4.92% lower than the pre-pandemic GDP of 2019-20. Clearly, the recovery is incomplete and India is not the fastest growing large economy in the world.

Arun Kumar is a retired Professor of Economics at Jawaharlal Nehru University. He is also the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’, 2020.