[Editorial Analysis] What the Q1 GDP numbers say

Mains Paper 3: Economy
Prelims level: GDP growth
Mains level: Indian economy: growth, development and issues


• India’s GDP data for Q1 of 2021-22 was released by the National Statistical Office (NSO) on August 31, 2021 which at 20.1%.

• Strong Base Effect: This is largely because of the contraction of 24.4% in the corresponding quarter of the first pandemic year, that is, 2020-21.

• This GDP number was lower than the corresponding level in 2019-20 by a margin of ₹3.3 lakh crore.

• A growth rate of 32.3% was required in Q1 of 2021-22 for achieving the same level of real GDP as in Q1 of 2019-20.

Annual growth prospects:

• While the economic impact of the first wave was more severe, the health impact of the second wave was more serious, due to different nature of scope of lockdowns. The Indian economy would have done better in Q1 of 2021-22 had its performance not been beset by the adverse impact of second wave.

• Growth Required to meet RBI’s 9.5% GDP growth forecast and IMF’s estimate: A growth of 6.8% for the remaining year would suffice. This should easily be feasible in Q2 since there would still be the benefit of a base effect, considering a contraction of 7.4% in Q2 of 2020-21.

• In Q3 and Q4 considering that the real GDP growth in 2020 was positive at 0.5% and 1.6%, respectively, achieving 6.8% growth would be more demanding.

Private Final Consumption expenditure (PFCE):

• The Largest portion of our GDP. Its average share over the last three years (2018-19 to 2020-21) was 56.5%.

• Growth estimate: In Q1 of 2021-22, it grew by 19.3%, which is marginally below the overall GDP growth. Also, the contraction in PFCE in the corresponding quarter of 2020-21 was relatively larger at 26.2%. It would have grown by 35.5% in this quarter to achieve desired growth.

• Private consumption Growth: PFCE mainly depends on income growth and its distribution. Thus, it would be useful to focus on supporting income and employment levels for the MSMEs and informal sectors, which have a higher propensity to consume.

Demand Side Growth:

• Exports, Gross fixed capital formation (GFCF) and government final consumption expenditure (GFCE).

• Exports: Exports grew by 39.1% Q1-2021, over a contraction of 21.8% in 2020-21 corresponding quarter. It is 8.7% higher than the export level in the corresponding quarter of 2019-20.

• GFCF: the base effect was quite large. Despite a growth of 55.3% in Q1 of 2021-22, its magnitude was still 17.1% lower than the corresponding level in Q1 of 2019-20.

• Government Expenditure (GFCE): The only demand segment which contracted even with reference to Q1 of 2020-21 was government expenditure. It contracted by a margin of (-) 4.8%.

The output side Growth:

• Key Service Sector — including trade, transport, storage; grew by 34.3% in Q1 of 2021-22 as compared to a contraction of 48.1% in Q1 of 2020-21. However, relative to its level in Q1 of 2019-20, the output of this large service sector was significantly lower by 30.2% in Q1 of 2021-22.

• Significant growth of 5.8% in Q1 of 2021-22 over Q1 of 2020-21 in — public administration, defence and other services. They actually reflected a contraction of 5.0% as compared to Q1 of 2019-20.

• Agricultural sector: It showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.

• However it can’t contribute further in Growth:
1. Given agriculture’s positive growth in all the quarters of 2020-21, further contribution from this sector to the overall growth may not be expected.
2. Its average weight to the overall output is also low at about 15%.

Future Growth:

• Main sectors: It is the high weight manufacturing sector and the two substantive service sectors — trade, transport et. al and financial, real estate et al. — which will have to support growth in the remaining part of the year.

• Recovery: Construction and electricity, gas, water supply and other sectors have already started showing a robust recovery.
• Government Role: These may respond further to the government’s emphasis on expanding investment in infrastructure.

Fiscal prospects:

• Impact of Government’s intervention: It is reflected by the performance of GFCE on the demand side, and the public administration, defence and other services sector on the output side.

• Fiscal Impact of this intervention: Fiscal data of the Controller General of Accounts released on August 31.

• Higher gross tax revenues (GTR): it grew sharply by 83.1% in April-July of 2021-22 over the corresponding period of 2020-21 and by 29.1% over the corresponding period of 2019-20.

• Centre’s fiscal deficit: in the first four months of 2021-22, it amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.

Way forward:

• Given the high tax collection, significant policy space is opening up for the government to raise its demand and its contribution to output in the remaining part of the current fiscal year.

• Given the fiscal room, both the coverage of vaccination and the pace of investment in health infrastructure should be accelerated within the strategy of expanding the overall infrastructure investment.

• As revenues improve, expenditures can be increased. There is no need to reduce the fiscal deficit below the budgeted level of 6.8% of GDP.


Prelims Questions:

Q.1) With reference to the Mahanadi Coalfields Ltd (MCL), consider the following statements:

1. It was carved out of South Eastern Coalfields Limited in 1992 with its headquarters at Sambalpur.

2. MCL was the first coal company to introduce environment-friendly Surface Mining technology in 1999.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

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