It’s official: GDP rate seen slumping to 5%
Paper: GS II & GS III
Topic: Government Policies and Interventions and issues arising out of their Design and Implementation.
For Prelims: Union Budget, GDP etc.
For Mains: The status of economy, Economic Development, Need for change in structure of reform.
Why in News: The National Statistical Office (NSO) released the first advance estimates of the national income that projected growth in India’s GDP at market prices for 2019-20 at 4.98% in “real” terms. It’s official now GDP rate seen slumping to 5%.
The current status of the economy
The National Statistical Office (NSO) released the first advance estimates of the national income
- Projected growth in India’s GDP at market prices for 2019-20 at 4.98% in “real” terms, the lowest since the 3.89% in the global financial crisis year of 2008-09.
- But even more significant was the estimated growth of 7.53% in “nominal” terms, which is the lowest since the 7.35% for 1975-76.
- Also, this is the first time since 2002-03 that nominal GDP growth has been in single digits.
- The GDP growth estimate of 5% is at the same level as projected by the RBI in its monetary policy review last month.
- The growth rate in terms of Gross Value Added (GVA), which is GDP minus net product taxes and reflects growth in supply, is seen slowing to 4.9 % in 2019-20 from 6.6% in the previous year.
- Two major employment generators are also showing signs of a slump, with growth in manufacturing seen slowing to a 15-year low and construction to a six-year low.
- A sector-wise breakup of the data shows the sharpest fall in manufacturing and construction, with only two out of eight sectors mining and quarrying, and “public administration, defence and other services” estimated to post a higher growth rate than the previous year.
- Weak private investment: Private consumption is estimated to slow to 5.8% this financial year from 8.1% in 2018-19, while gross fixed capital formation has fallen from 29.3 % to 28.1% reflecting weak private investment.
What is nominal GDP and how is it different from real GDP?
- GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products.
- The market value taken at current prices is the nominal GDP.
- The value taken at constant prices for all products taken at an unchanged base year is the real GDP.
- In simple terms, real GDP is nominal GDP stripped of inflation.
- Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year.
- Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from the rise in both production and prices.
But why should nominal growth matter at all?
- In the normal course:
- The real growth is what one would ordinarily look at.
- But the current fiscal year seems extraordinary because the gap between nominal and real GDP growth is just 2.6 %points.
- This is marginally higher than the difference of 2.5% points in 2015-16. But in that year, real GDP growth was 8%, which translated into a nominal growth of 10.5%.
Why is this a major concern and their implication?
- Producers have not gained from either higher output or higher prices: In 2019-20, not only is real GDP growth expected to be the lowest in 11 years, but also the implied inflation (also called GDP deflator, or the increase in prices of all the goods and services produced in the economy) is just 2.6%. Simply put, producers have not gained from either higher output or higher prices.
- Households and firms– How much their income has grown relative to the previous year? When that growth falls to single digits in a country like India, which has been used to a minimum 5-6% GDP increase year after year and an equal rate for inflation, it is unusual. Low nominal GDP growth is associated more with developed western economies.
- Corporates:
- In the past, listed companies have seen their turnover double in five years or so, which comes with a nominal year-on-year growth of 14-15%. If the latter falls to 7-8%, the same doubling would take 9-10 years.
- This can have a psychological impact although it could also be the case that the value of their inputs, including salaries paid to employees, would also be rising at a slower rate. Their net earnings or profits would not, therefore, be hurt to the same extent.
- The government: The problem is more serious when it comes to the government.
- To make matters worse, the Centre’s spending momentum, which dipped in October-November 2019, could slow further as revenue concerns necessitate an expenditure squeeze by both the central and state governments in the ongoing quarter.
- In the 2019-20 Budget, the Finance Minister had assumed nominal GDP would grow by 12% to Rs 211.01 lakh crore. However, the NSO’s latest projection of nominal GDP for 2019-20 is only Rs 204.42 lakh crore, which is Rs 6,58,374 crore below the Budget estimate.
- As a result, even if the Centre’s fiscal deficit is contained at the budgeted Rs 7,03,760 crore in absolute terms, the latter would now work out to 3.44% of GDP, as against the originally targeted 3.3%.
- This is over and above the slippages in the absolute fiscal deficit itself due to the Centre’s revenues from taxes and other receipts, including disinvestment, turning out to be lower than the Budget projections.
- The debt stock (numerator) can keep going up so long as it does not exceed the nominal increase in GDP (denominator). That equation changes in a low nominal GDP growth scenario and becomes difficult to manage government debt.
- For state governments too: the low nominal GDP growth is a matter of concern because their budgets normally assume double-digit increases in revenues.
- The Centre’s compensation formula to states from the Goods and Services Tax also promised to meet an annual revenue shortfall below 14%.
- That again did not even factor in the possibility of GDP growth (real plus inflation) falling to 7.5% levels.
So is low single-digit nominal GDP growth the new normal?
- The only time India had as many as three consecutive years of single-digit nominal GDP growth was from 2000-01 to 2002-03.
- The nominal growth in those three years were 7.62% (2000-01), 8.2% (2001-02) and 7.66% (2002-03). A repeat looks unlikely as of now, given rising food and fuel prices, especially in the last three months or so.
- Also, the current real GDP growth of 4.98% is higher than the 3.8%, 4.8% and 3.8% respectively of those three years.
Conclusion
- A major area of concern for policymakers is that with the exception of government expenditure, all other demand drivers private consumption, investment and exports are flagging.
- The NSO expects government spending to grow at 13.7 % (current prices). How it manages this conundrum in the face of pressure to stick to the fiscal deficit target will be clear when it presents the budget in a few weeks from now.
- With the ongoing efforts by the current government to revive growth and investment activity, things should hopefully improve from the coming fiscal.
Way Forward
- High nominal GDP growth makes the government’s debt more manageable, so focus should be given on that.
- Rabi sowing will provide support to agricultural growth in the ongoing quarter, even though the assumption of government spending for the second quarter seems optimistic given the shortfall in receipts.
- The finance minister must present an honest assessment of the economy as well as the state of government finances in the upcoming budget. This would provide clarity on the fiscal space available to the government for supporting the economy.
- The government should also realise the limits of fiscal and monetary stimulus. At the current juncture, a comprehensive reform package is needed to return growth to a higher trajectory in the medium term.
Prelims Question
With reference to Gross Domestic Product consider the following statements:
- Nominal GDP growth measures how much the production of goods and services in the economy has increased in actual physical terms during a year.
- Real GDP growth, on the other hand, is a measure of the increase in incomes resulting from the rise in both production and prices.
Which of the statements given above is/are correct?
(a) 1 Only
(b) 2 Only
(c) Both 1 and 2 Only
(d) None of the above
Answer: D
Explanation: Both of the statements has interchanged.
Why statement 1 is incorrect:
- GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products.
- The market value taken at current prices is the nominal GDP.
- The value taken at constant prices for all products taken at an unchanged base year is the real GDP.
- In simple terms, real GDP is nominal GDP stripped of inflation.
- Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year.
Why statement 2 is incorrect: Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from the rise in both production and prices.
UP to build Rs 234-crore zoo named after Ashfaqullah Khan.
Paper: GS I & GS II
Topic: Modern Indian History from about the middle of the eighteenth century until the present significant events, personalities, issues.
For Prelims: Ashfaqulla Khan.
For Mains: Personalities associated with Modern Indian History.
In News: UP to build Rs 234-crore zoo named after Ashfaqullah Khan.
About Ashfaqulla Khan
- Ashfaqulla Khan (22 October 1900 – 19 December 1927) was one of the first freedom fighterin the Indian independence movement.
- This revolutionary man became a martyr and a legend among his people due to his love for the motherland, his clear thinking, unshakeable courage, firmness, and loyalty.
- Ashfaqulla Khan was born in Shahjahanpur, North-Western Province, and British Indiato Shafiqullah Khan and Mazharunissa.
- Ashfaq composed poems mostly in Urdu and a few in Hindi, under the pen names Varasi and Hazarat.
- Becoming Extremist:
- In 1920, Mahatma Gandhilaunched his Non-cooperation movement against the British rule in India. But after the Chauri Chaura incident in 1922, Mahatma Gandhi decided to withdraw the call for this movement.
- At that point, many young people including Ashfaqulla Khan felt depressed.
- Some of them including Ashfaqulla Khan became extremists and turned to organisations like the Hindustan Socialist Republican Associationwhich was founded in 1924. This association’s purpose was to organize armed revolutions to achieve a free India.
- Kakori train robbery:
- To give a boost to their movement and buy arms and ammunition to carry out their activities, the revolutionaries of the Hindustan Socialist Republican Associationorganised a meeting on 8 August 1925 in Shahjahanpur.
- After a lot of deliberations, it was decided to loot the government treasury carried in the trains.
- On 9 August 1925, Ashfaqulla Khan and other revolutionaries, namely looted the train carrying British government money in Kakori near Lucknow.
- On the morning of 26 September 1925, Bismil was caught by the police and Ashfaqulla Khan was the only one untraced by the police.
- He went into hiding and moved to Banarasfrom Bihar, where he worked in an engineering company for 10 months.
- He wanted to move abroad to learn engineering to further help the freedom struggle and so he went to Delhito find out ways to move out of the country. He took the help of one of his Pathan friends who also was his classmate in the past. This friend, in turn, betrayed him by informing the police about his whereabouts.
- Ashfaqullah Khan was detained in the Faizabadjail and a case was filed against him. His brother Riyasatullah Khan was his legal counsel. While in jail, Ashfaqulla Khan recited the Quran and started saying his prayers regularly and during the Islamic month of Ramadan strictly fasted.
- The case for the Kakori dacoity was concluded by awarding death sentence to Bismil, Ashfaqulla Khan, Rajendra Lahiri and Thankur Roshan Singh. The others were given life sentences.
- Ashfaqulla Khan was put to death by hanging on 19 December 1927 at Faizabad jail.
UP to build Rs 234-crore zoo named after Ashfaqullah Khan
- A proposal to set aside Rs 234 crore for construction of a zoological garden named after Shaheed Ashfaqullah Khan in Gorakhpur.
- The zoo will come up across over 121 acres.
- The objective was to attract tourists and increase employment opportunities.
- The purpose of the zoological garden is the conservation of wildlife. At present, there are two zoological gardens in Uttar Pradesh, one in Lucknow and another in Kanpur. Shaheed Ashfaqullah Khand Zoological Garden was proposed in 2008-2009.
- With this zoo, Gorakhpur will be developed as a tourist spot and would be recognised internationally with this project.
Prelims Question
With reference to the Ashfaqulla Khan, the freedom fighter of India considers the following statements:
- He was an extremist and was one of the revolutionary members of the Kakori conspiracy case.
- He was a poet also and composed poems mostly in Urdu and a few in Hindi, under the pen names Varasi and Hazarat
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) None of the above
Answer: C
Explanation: Both the statements are correct.
Why statement 1 is correct:
- On 9 August 1925, Ashfaqulla Khan and other revolutionaries, namely Ram Prasad Bismil, Rajendra Lahiri, Thakur Roshan Singh, Sachindra Bakshi, Chandrashekar Azad, Keshab Chakravarty, Banwari Lal, Mukundi Lal, Manmathnath Guptalooted the train carrying British government money in Kakori near Lucknow.
- The case for the Kakori dacoity was concluded by awarding death sentence to Bismil, Ashfaqulla Khan, Rajendra Lahiri and Thankur Roshan Singh. The others were given life sentences.
Why statement 2 is correct: Ashfaqulla Khan composed poems mostly in Urdu and a few in Hindi, under the pen names Varasi and Hazarat.