BASE EFFECT

BASE EFFECT

Subject : Economics

Context: Crisil expects India’s gross domestic product (GDP) growth to rebound to 11 per cent in fiscal 2022 after an estimated 8 per cent contraction this fiscal. The analytics company sees growth next fiscal (FY22) to be a story of two halves, with base effect lifting the first half and broad-based growth in the second.

Concept:

• The base effect refers to the impact of the rise in price level (i.e. last year’s inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation).
• If the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to a relatively lower inflation rates.
• On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.