India’s advance estimates of GDP Key t

Q. What is the news?

• According to recently released advance estimates by central Statistics Office , India’s Real GDP is estimated to contract by 7.7% in FY21 compared to a growth of 4.2% in FY20, this released  estimates ahead of the Union budget suggest. India’s annual GDP last contracted in FY80 by 5.24%. However, this is the steepest contraction since independence, suggest figures collated from the CSO.
• According to MoSPI, India’s gross domestic product (GDP) — the total value of all final goods and services produced within the country in one financial year — will contract by 7.7 per cent in 2020-21.

Q. What are the First Advance Estimates of GDP? What is their significance?

• For any financial year, the MoSPI provides regular estimates of GDP. The first such instance is through the First Advance Estimates . The FAE for any particular financial year is typically presented on January 7th.
• Their significance lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s Budget allocations.
• The FAE will be quickly updated as more information becomes available. On February 26th, MoSPI will come out with the Second Advance Estimates of GDP for the current year.

For Budget calculations

• The first advance estimates of GDP, obtained by extrapolation of seven months’ data, are released early to help officers in the Finance Ministry and other departments in framing the broad contours of Union Budget 2021-22. The second advance estimates of GDP will be released on February 26.

Q. How are the First Advance Estimates arrived at before the end of the concerned financial year?

• The FAE are derived by extrapolating the available data. According to the MoSPI, the approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
• The sector-wise estimates are obtained by extrapolating indicators such as : 

1. Index of Industrial Production (IIP) of first 7 months of the financial year
2. Financial performance of listed companies in the private corporate sector available up to quarter ending September, 2020
3. The 1st Advance Estimates of crop production,
4. The accounts of central & state governments,
5. Information on indicators like deposits & credits, passenger and freight earnings of Railways, passengers and cargo handled by civil aviation, cargo handled at major sea ports, sales of commercial vehicles, etc., available for first 8 months of the financial year.

Q. How is the data extrapolated?

• In the past, extrapolation for indicators such as the IIP was done by dividing the cumulative value for the first 7 months of the current financial year by average of the ratio of the cumulative value of the first 7 months to the annual value of past years.
• So if the annual value of a variable was twice that of the value in the first 7 months in the previous year then for the current year as well the annual value is assumed to be double that of the first 7 months.
• However, this year, because of the pandemic there were wide fluctuations in the monthly data. Moreover, there was a significant drop, especially in the first quarter, on many counts. That is why the usual projection techniques would not have yielded robust results.
• As such, MoSPI has tweaked the ratios for most variables.

Q. What are some of the Key takeaways from the First Advance Estimates for 2020-21?

1 GDP Growth Rate:

• In the context of recent history, the 7.7 per cent contraction in GDP (see Table 1) is a sharp one considering that India has registered an average annual GDP growth rate of 6.8 per cent since the start of economic liberalisation in 1992-93.

• But, a big reason for the contraction this year has been the disruption caused by Covid-induced lockdowns which saw the economy contract by almost 24 per cent in the first quarter (April, May and June) and by 15.7 per cent during the first half (H1) of the year (first two quarters or from April to September). As a result, the domestic economy had entered a technical recession.
• However, in the second half of the current financial year — that is, October to March — the government expects the economy will produce almost exactly the same amount of goods and services that it produced in the second half of the last financial year (2019-20).
• In the H1 of 2020-21, India produced goods and services worth Rs 60 lakh crore — much lower than the Rs 71 lakh crore worth of goods produced in H1 of 2019-20.
• But in H2 of 2020-21, MoSPI expects GDP to be worth Rs 74.4 lakh crore, which is roughly the same as the GDP in H2 of 2019-20 — about Rs 74.7 lakh crore.
• For the full year of 2020-21 then, India’s GDP is likely to be Rs 134.4 lakh crore as against Rs 145.7 lakh crore in 2019-20.

2 Absolute level of real GDP:

• At Rs 134.4 lakh crore, India’s real GDP — that is, GDP without the influence of inflation — in 2020-21 will be lower than the 2018-19 level .