Gross Domestic Product (GDP) of India increased by 8.7% in 2021-22 (or FY22) according “provisional estimates” released Tuesday by the Ministry of Statistics and Program Implementation. This growth is accompanied by a 6.6% contraction in GDP in 2020-2021, when the pandemic led to massive disruptions and widespread lockdowns. GDP measures the value of all ‘final’ goods and services – those purchased by the end user – produced in a country during a given period (say a quarter or a year).
The published data also showed that gross value added (or GVA) – another measure of national income – increased by 8.1% in FY22. In FY21, GVA had increased contracted by 4.8%.
The key questions are: Was the recovery in FY22 good enough to recover from the FY21 contraction? If so, have all sectors recovered? If the recovery is not “broad”, which sectors or sections remain behind where they were before Covid hit?
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How are GDP and GVA different?
While GDP calculates national income by adding up all the expenditures of the economy, GVA calculates national income on the supply side by looking at the value added in each sector of the economy.
The two measures of national income are related as follows:
GDP = GVA + Taxes collected by government — Subsidies provided by government
As such, if the government has earned more in taxes than it has spent on grants, GDP will be greater than GVA. If, on the other hand, if the government provided subsidies greater than its tax revenue, the absolute level of GVA would be greater than that of GDP.
Simply put, GDP provides the demand side of the economy and GVA provides the supply side.
What does the data show?
As shown in Chart 1, at the aggregate level, both in terms of GDP and GVA, the economy has moved beyond the pre-Covid level (FY20). In other words, it has recovered all the ground lost due to the FY21 contraction. However, the GDP and GVA subcomponents reveal the true extent of this recovery.
What does GDP data show?
Broadly speaking, GDP has four engines of growth in any economy.
In India’s case, the biggest driver is private consumer demand—the money people spend privately. This demand typically accounts for 56% of all GDP and is technically called “private final consumption expenditure” or PFCE.
The second most important driver is the money spent by companies and the government to make investments such as building a new office, buying a new computer or building a new road, etc. This type of expenditure or “demand” accounts for 32% of all GDP in India; and is technically called gross fixed capital formation or GFCF.
The third driver is the money spent by the government on its day-to-day expenses such as paying salaries. This represents 11% of India’s GDP and is referred to as ‘Government Final Consumption Expenditure (GFCE)’.
The fourth driver is the demand for “net exports” (NX). This is the money spent by Indians on foreign goods (i.e. imports) subtracted from the money spent by foreigners on Indian goods (exports). Since most years India imports more than it exports, the NX is the smallest driver of GDP growth and is often negative. It is for this reason that NX will be excluded from the rest of the analysis.
So, GDP = PFCE + GFCF + GFCE + NX
As shown in Table 1, although all components have risen above the pre-Covid level, the recovery is different. In fact, in percentage terms, recovery is the opposite of the relative importance of different types of requests.
So while government spending is more than 6% above FY20 levels, investment (with three times the weight) has grown less than 4% and private demand (with five times the weight) n is only 1.4% above the FY20 level.
What does GVA data show?
Overall GVA was almost 3% higher than in fiscal 2020.
As shown in Table 2, while all sectors show an increase in FY21, different sectors of the economy tell a different story. Agriculture and related sectors, for example, have never contracted and have continued to grow over the past two years. By the end of FY22, it was 6.5% above pre-Covid levels.
Manufacturing is up more than 9% from pre-Covid levels. But there are other sectors (such as mining and construction) that show either a moderate increase or a deficit – contact-intensive services such as trade and hospitality, etc. are still more than 11% below pre-Covid levels.
What’s the takeaway?
It is a matter of relief that the Indian economy has, at least on aggregate metrics, surpassed pre-Covid levels. However, this rally is neither uniform nor widespread and has created its own set of winners and losers.
This so-called “K-shaped” recovery—or growing inequality in the economy—is best illustrated by Chart 2. It shows that although at the aggregate level, GDP (national income) and CCTB (expenditure) have crossed pre-Covid period, the average Indian has yet to recover.
The second takeaway is that this is only a “recovery” from the pre-Covid level – not what the pre-Covid growth trajectory would be. According to the RBI, returning to the pre-Covid trajectory will take India through 2034-35 and that too is conditional on an annual economic growth rate of 7.5%.
Finally, when it comes to future growth, the outlook is sobering. Growing geopolitical uncertainties, rising crude oil prices (and inflation), tighter monetary conditions (higher interest rates), etc. are likely to dampen anemic growth in private consumer demand and therefore dampen growth prospects for the current (FY23) and upcoming (FY24) fiscal year.