Explained: Why has government cut India’s GDP growth rate to 6.1%
Written by Udit Misra | Published: January 31, 2020 8:39:35 pm India’s GDP growth rate falters further Just on the eve of the presentation of the Union Budget for the next financial year (2020-21), the government has sharply cut back the GDP...
Just on the eve of the presentation of the Union Budget for the next financial year (2020-21), the government has sharply cut back the GDP growth rate for the last financial year (2018-19). According to a press release by the Ministry of Statistics and Programme Implementation, India’s GDP grew by just 6.1 per cent in 2018-19 instead of the earlier figure (which was presented in May 2019) of 6.8%.
This revision further shows that India seems to be losing its growth momentum just as fast as it acquired it in recent years (see Table).
Why has the government revised the GDP data?
At one level, GDP data revisions are a routine exercise. The press release on Friday presented the First Revised Estimates for 2018-19, the Second Revised Estimates for 2017-18 and the Third Revised Estimates for 2016-17.
|Year||GDP growth rate (in %)|
|2020-21||? (Budget to announce)|
Table: India’s GDP growth rate falters further. (Source: MOSPI)
It makes perfect sense to revise these data points because often the more accurate information about variables is available only with a lag. This is especially true for sectors like agriculture.
What has led to the downward revision?
Essentially the downward revision is because of a sharp cut in the growth of the primary sector of the economy. The primary sector includes sectors such as agriculture, forestry, fishing, mining and quarrying. In the revised estimates the growth in gross value added in the primary sector has been cut from 2.7 to just 1 per cent.
The growth in the secondary sector too has been dialled down from 7.5 to 6 per cent. The secondary sector includes manufacturing, construction, electricity, gas, water supply and other utilities.
What is the significance of the downward revision?
There are two main takeaways. First, while the revision process is routine, it is the sharpness of the revision that is surprising and is likely to raise question marks about the system’s ability to accurately map economic growth.
More importantly, it shows that the government was behind the curve in ascertaining the intensity of the economic slowdown gripping the Indian economy during 2018-19. This trend of underestimating the slowdown carried on even when the last Budget was presented last July. But as the data released since has consistently shown, the government was behind the curve.
Secondly, it would be interesting how this downward revision affects the GDP growth rate revision for the current financial year (2019-20). Why? That’s because typically a lower base in 2018-19 would imply that, with the same level of absolute growth in 2019-20, the growth rate would be higher.
But there could be a fly in the ointment. A slowing economy has its own dynamics and it is possible that there are second- or third-order effects of slower growth. For example, slower growth in 2018-19, could have depressed consumption in the rural areas in 2019-20 even further. Of course, it might take another year at least before that data is known.