Challenges w.r.t normalization of the Indian Economy

Challenges w.r.t normalization of the Indian Economy

Subject: Economy

Section: Economic Growth

Context: NSO’s recent release of India’s GDP data for Q3 of 2021-22 along with Second Advanced Estimates (SAE) implies that post covid-19, the normalization of the economy has been disturbed by the ongoing geopolitical uncertainties.

Concept:

• NSO’s GDP data highlights that in 2021-22, the nominal GDP growth at 19.4% is significantly higher than the real GDP growth due to an inordinately high implicit price deflator (IDP) based inflation ratio of 9.6%.

Reasons:

• Sluggish revival in domestic demand – as measured by Private Financial Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF).
• Contact intensive segments (trade, transport) in the output side is low.
• Waning base effects that shows both GDP and GVA having normalizing growth.
• Crude upsurge has led to reduction in real GDP growth by 27 basis points and an increase in CPI inflation by 40 basis points.

Challenges ahead due to global uncertainties: 

• Rise in fiscal deficit: Higher expenditure for petroleum and fertilizer subsidies
• Worsening of Current account balance– due to higher import bills + rupee depreciation.
• Sectoral supply side bottlenecks and cost escalationr.t fertilizers, iron and steel foundries, transportation, construction and coal (as these rely on petroleum products).
• Trade disruption to and from Russia and Ukraine due to discontinuation of transactions through SWIFT.
• Financial outflows: Net FPI outflows increased and Net FDI inflows declining.

What is Implicit Price Deflator ?

• The Implicit Price Deflator (IPD) is used to calculate inflation at the corporate or governmental level because this index includes all product types, rather than ones typically consumed by individuals.
• The IPD represents the percent change from a base year, which changes every several years.
• Movements in an implicit price deflator reflect both changes in price and changes in the composition of the aggregate for which the deflator is calculated.

How it is Calculated?

• An implicit price deflator (IPD) is obtained by dividing a current price value by its real counterpart (the chain volume measure). When calculated from the major national accounting aggregates such as GDP, IPDs relate to a broader range of goods and services in the economy than that represented by any of the individual price indexes (such as CPIs, PPIs).

Inflation

• Inflation is the rate of increase in prices over a given period of time.
• Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.
• The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

What is base effect?

https://optimizeias.com/base-effect/