ExplainSpeaking: What to look for in preliminary GDP estimates for 2021-22

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Dear readers,

On May 31, the Department of Statistics and Programs Implementation (MoSPI) will release the so-called “provisional estimates (or PEs)” of GDP for the last financial year (2021-22).

Before we get into what PEs are, here is a quick definition of GDP.

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GDP measures the monetary value of all “final” goods and services – that is, those purchased by the final consumer – produced in a country in a given period (e.g., a quarter or a year). More information on GDP read this piece.

What are preliminary estimates and what is their significance?

The preliminary estimates are important as they will be the first formal estimates of how India has grown for the full fiscal year 2021-22.

In the past, the MoSPI has published two “forecasts” of GDP.

The First Advance Estimates (FAEs) were released on January 7 and they expected India’s GDP to grow by 9.2% in 2021-22. Of course, the January 7th FAEs were largely based on data from the first two quarters – April to June and July to September. Read this article to learn more about the FAEs.

Next, in late February, the MoSPI updated the FAEs by adding data for the third quarter (October through December). These were referred to as Second Advance Estimates (SAEs). SAE throttled full year growth to 8.9%. Read this piece to understand what the SAE were telling us about the economy.

The preliminary estimates (or PEs) that will be released on August 31 go a step further. They will add the data from the fourth quarter (January to March) providing the most complete picture of how the Indian economy has performed in 2021-22.

Certainly, India’s economy had contracted by 6.6% in 2020-21 thanks to the Covid disruption. Therefore, GDP growth in 2021-22 will tell us the extent of India’s economic recovery. A good way to do this is to compare each metric to where it was in 2019-20, as that is pre-Covid levels.

Aside from how robust India’s recovery has been, the preliminary estimates will also form the basis on which fiscal year-to-date GDP growth is calculated.

What should be taken into account when making preliminary estimates?

GDP and GVA

For each fiscal year, the two main variables of national income are GDP and GVA (or gross value added). GDP calculates India’s national income by adding up all spending in the economy while GVA calculates national income from the supply side by looking at value added in each economic sector.

While both variables measure national income, they are related as follows:

GDP = (GVA) + (taxes collected by government) — (subsidies provided by government).

So if the government collects more in taxes than it spends on subsidies, GDP will be higher than gross value added. On the other hand, if the state were to grant subsidies that exceeded its tax revenues, the absolute amount of gross value added would be higher than the absolute amount of GDP.

Table 1: GDP and GVA values ​​since 2014

Table 1 details GDP and GVA levels since 2014. The key year for comparing FY22 is FY20, the year before Covid.

Subcomponents of GDP

While the overall GDP level is important for knowing where the economy is compared to pre-Covid, it is important to note that people know what is causing growth and what is holding back India’s growth. This is where the sub-components of GDP come into play.

Knowing about them helps us understand how sustainable India’s economic recovery is.

Broadly speaking, GDP has four engines of growth in any economy.

For example, in the case of India, private consumption (C) demand from individuals is the main driver. This demand typically accounts for 56% of total GDP and is technically referred to as “Private Consumption Expenditure” or PFCE.

The second biggest driver is investment spending (I). This accounts for 32% of the total GDP in India; and is technically referred to as gross fixed capital formation or GFCF.

The third engine of GDP growth is the money the government G) spends on fulfilling its daily provisions. This demand accounts for 11% of India’s GDP and is known as the Government Final Consumption Expenditure (GFCE).

The fourth engine of GDP growth is the money spent on “net exports” (NX). The NX is nothing but the money Indians spend on foreign goods (i.e. India’s imports) subtracted from the money foreigners spend on Indian goods and services (i.e. India’s exports). With India importing more than it exports most years, the NX is the smallest engine of GDP growth and is often negative.

So, BIP = C (or PFCE) + I (or GFCF) + G (or GFCE) + NX

Table 2 describes the different components of GDP and how they contributed to overall GDP.

Table 2: Different components of GDP

Readers will note that there were dramatic subcomponent differences between the FAEs and the SAEs.

Income and expenditure per capita

Overall GDP often doesn’t give us the full picture.

To better understand how an average Indian is affected, the GDP datasheet also looks at per capita income (or pc GDP) and per capita expenditure (or PFCE per capita).

table 3 describes the situation in these two variables.

Table 3: While overall levels of GDP and spending may have exceeded 2019-20 levels, India per capita continues to struggle

Most importantly, while the overall level of GDP and spending may have exceeded 2019-20 levels (Table 1), India continues to struggle per capita.

GVA subcomponents

The preliminary estimates include the first official estimates of gross value added for the fourth quarter and for the full fiscal year. The subcomponents of GVA tell us which sectors of the economy are doing well and which are struggling to grow.

Table 4 shows the division of the economy into eight productive sectors and the GVA in each of them.

Table 4: Division of the economy into 8 productive sectors

The way to read this table is to re-compare the amount of value added in a given sector (e.g. manufacturing) in 2021-22 and then compare it to the 2019-20 (pre-Covid) level. to compare. This data set is based on the SUEs. But the preliminary estimates will update all of these data points.

What do you expect for India’s GDP growth in the last fiscal year? More importantly, what do you think India’s GDP will be in the current fiscal year? Share your views and questions at udit.misra@gmail.com.

Take care,
Udit

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