Q1 GDP: Never-before-seen 20.1% growth boost it may be, but there's a smoking gun...

The 20.1% growth boost doesn't warrant much celebratory cheer as national output with GDP as the measuring rod appears 'deceptively high'.

Published: 31st August 2021 07:31 PM  |   Last Updated: 31st August 2021 07:36 PM   |  A+A-

India GDP

(Express Illustrations | Amiit Bandre)

Express News Service

The economy came up flowers. In Q1, real GDP growth shot up 20.1% as against the 24% contraction seen last year, which had no equal in history. 

Growth rate has been positive for three consecutive quarters, and the next three quarters must outperform for the Indian economy to crack 9.5% on the year. 

The National Statistics Office's provisional estimate of 20.1% is lower than RBI's 21.4%, but reaffirms hopes of the Indian economy jolting to life, finally. 

On a sequential basis though, growth contracted by an alarming 9.2%. In absolute numbers, real economic output is down by Rs 6.5 lakh crore in June quarter over March. Some of this was due to the second wave of Covid-19 pandemic.

The 20.1% growth boost also doesn't warrant much celebratory cheer as national output with GDP as the measuring rod appears 'deceptively high'. 

At least this fiscal, one may prefer to sideswipe the GDP (Gross Domestic Product) gauge as an understudy, as the increase in real output seems significantly influenced by higher tax collections. If government earns more taxes than its subsidy outgo, GDP will be higher than GVA (Gross Value Added). The reverse happens when subsidies exceed tax revenue. 

And here's the smoking gun. The divergence between GDP and GVA in Q1 stood at Rs 1.9 lakh crore, higher than the Rs 1.3 lakh crore seen in Q1, FY21.  

GDP and GVA are like identical twins. But GDP includes taxes minus subsidies, while GVA excludes both to serve as the cleanest guide to growth or the slack of it. Often, economists consider GVA as a better gauge to understand sequential growth. 

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In Q1, GVA growth was phenomenal over last year with all eight metrics coming out of an economic coma of 2020. But when pitted against the pre-pandemic period of Q1 FY20, it isn't all roses. Crucial sectors including mining, manufacturing, construction and the entire services sector remained in negative territory. Even on a sequential basis, electricity, construction, trade and financial services, which fared better during the March quarter, took a knock by June perhaps due to the state-level lockdowns eventually delivering a de-growth. This also indicates a deeper weakness inherent in critical supply-side sectors of the economy. 

On the demand side, all three key metrics consumption, private investments and government expenditure grew over last year in Q1, but they are still way behind the pre-pandemic phase. 

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Compared with Q1, FY20, consumption contracted by 12% in Q1 this fiscal and must improve ahead of investment demand for a sustained upswing to take hold. 

Latest CMIE and RBI consumer confidence surveys aren't really encouraging, but Sabyasachi Kar, RBI Chair Professor, Institute of Economic Growth remains optimistic seeing the pace of recovery. That said, he believes there's scope for policy interventions, given the uneven impact on incomes. 

"The income losses for the affluent has been minimal, and while they may be small in terms of population size, they form a sizable part of the private consumption demand. In fact, sectors that cater to this income class including white goods or automobiles sector may see a supply constraint and inflationary pressure. The government should help with issues around supply chain management," he noted. 

According to Kar, the consumption demand of the poor has to come from transfer payments from the government. Here, Budget 2021 had already proposed a large deficit and implementing that deficit will be sufficient for a consumption boost. "Finally, there's scope for optimism on the net exports front," he noted.


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