Vijay Kumar Gaba: Nominal GDP

Friday, September 11, 2020

Nominal more important than real

The precipitous fall in 1QFY21 GDP has attracted attention of most people. The economic managers of the government have sought to pass 23.9% yoy contraction in real GDP as an exceptional event which is direct outcome of the global lockdown due to outbreak of COVID-19 pandemic.

Indubitably, the contraction is a non recurring event and may not be a trend beyond FY21. Nonetheless, adjusted for lockdown also, the current slowdown does not appear be entirely cyclical. It certainly has some element of structural weakness in the economy.

I have highlighted this issue earlier also. In my view, the fall in nominal GDP is more worrisome than the real GDP. This fall has been more consistent and sharp in past 7 years. The nominal GDP growth rate has almost halved during FYFY13 and FY20.

For common man nominal GDP is more important because lot of variables like effective taxation, budgetary allocations for development and social welfare, subsidies, salaries of public servants, etc are calculated as a factor of the nominal GDP. Lower nominal GDp essentially means, lower income for people and lower tax revenue for the government.

For example, the sharper fall in nominal GDP has resulted in sharper rise in effective rate of indirect taxes; which impacts the common people more, resulting in increase in income inequality and social injustice.

Moreover, the public expenditure which has been supporting the GDP for past few years, will be constrained due to lower nominal GDP and therefore lower tax revenue. For key parameters of fiscal health, e.g., government borrowing, fiscal deficit etc., also nominal GDP is the denominator. A lower denominator would make fiscal health look weak even if deficit and borrowings remain the same in absolute terms.

Some other pointers to the non cyclicality of the GDP slowdown could be listed as follows:

Sales of commercial vehicle recorded negative growth in most of the previous 6 quarters. It continues to remain negative.
Cargo and passengers handled at Airports recorded negative growth even in the 1QFY20.
Manufactured product inflation has been below 2% for most of previous 6 quarters. This highlights lack of pricing power with the manufacturers. When juxtaposed with persistently low capacity utilization, it indicates that the pricing power may not return anytime soon and nominal GDP growth rate may continue to slide.
Even after 22years of NELP, we have not been able to significantly ramp up the local production of crude oil and natural gas. Even the coal imports have not seen any meaningful reduction.

Tuesday, June 2, 2020

Growth trajectory slips further

The 4QFY20 economic data has again highlighted the points, I have been emphasizing for past many quarters, which is-

(i) The economic growth in India has been declining structurally since the global financial crisis (GFC) of 2008-09. For couple of year, monetary and fiscal stimulus given by the extant government to mitigate the impact of global crisis supported the growth. However, post FY13, the growth trajectory never looked like retracing to pre GFC levels. A strong number in FY22 would be purely a base effect.

(ii) The long term growth curve in India has shifted down. The potential growth in India is no longer 8% plus. The pivot is somewhere close to 6%.

(iii) The global deflationary pressures are causing the nominal growth curve to shift down even more than the real growth. It is pertinent to note that a sustained fall in nominal growth would be new phenomenon for Indian policy makers and population alike.

The government's budget, revenue and expenditure targets, sectoral allocations, and all allocation for all social and development programs is usually based on the nominal growth numbers. The benign inflation post GFC has resulted in a faster decline in nominal GDP growth as compared to the real GDP growth. However, now the nominal growth has reached the level where a decline would directly result in lower wages, lower rental and lower returns on savings.

A sustained downward trend in nominal growth may result in some dramatic adjustments in socio-economic structure. The effective rate of taxation may have to be raised considerably to meet the social development targets. The household savings that have been a traditional source of safe and steady funding for both corporate and government may decline widening the gap for fiscal and corporate funding. The socio-economic inequalities may rise materially as the poor and middle classes become sustenance households (earning just to meet the expenses, just like developed economies) without any material social security benefit.

As RBI recently highlighted in its monetary policy statement the inflation trajectory is most likely to remain benign, except for few cyclical spikes in food inflation. This essentially means, the policy makers, administrators, businesses, workers, consumers, savers and farmers all might need to reset their plans, policies, aspirations and expectations.