First Advance Estimate FY 2022

Subject – Economy

Context – FY22 GDP growth put at 9.2% as agri, manufacturing shine

Concept –

The government estimated the economic growth for the 2021-22 fiscal year at 2 per cent, expecting limited impact of the third Covid wave on the economy.
- Last financial year, FY21, the GDP had contracted by 7.3%.
With this, the size of India’s economy is expected to swell to $3.2 trillion. Also, this estimate is the highest in nearly two decades.
The NSO, however, made clear that these were “early projections” that did not factor in actual performance of various indicators as well as measures that may be taken to contain the spread of the pandemic.
The government number is, however, lower than the RBI estimate of 9.5 per cent, closer to India Ratings & Research revised forecast of 9.3 per cent, but higher than the projections by global and domestic agencies; some had put it under 9 per cent.

“GDP at constant prices (2011-12) in the year 2021-22 is estimated at ₹147.54 lakh crore, as against the provisional estimate of GDP for the year 2020-21 of ₹135.13 lakh crore,” the NSO said, adding that growth in real GDP is pegged at 9.2%.

What are the First Advance Estimates of GDP?

The FAE, which were first introduced in 2016-17, are typically published at the end of the first week of January.
They are the “first” official estimates of how GDP is expected to grow in that financial year.
But they are also the “advance” estimates because they are published long before the financial year (April to March) is over.
It is important to note that even though the FAE are published soon after the end of the third quarter (October, November, December), they do not include the formal Q3 GDP data, which is published at the end of February as part of the Second Advance Estimates (SAE).

What is their significance?

Since the SAE will be published next month, the main significance of FAE 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.
From the Budget-making perspective, it is important to note what has happened to nominal GDP — both absolute level and its growth rate. That’s because nominal GDP is the actual observed variable. Real GDP, which is the GDP after taking away the effect of inflation, is a derived metric. All Budget calculations start with the nominal GDP.
- Real GDP = Nominal GDP — Inflation Rate
However, from the perspective of the common people, real GDP is what matters. The difference between the real and nominal GDP shows the levels of inflation in the year.

How are the FAE 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 i.e. “the estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.”
- For instance, for these FAE, the MoSPI has extrapolated sector-wise estimates using indicators such as Index of Industrial Production (IIP) up to October, inflation — both retail and wholesale — data up to November, sale of commercial vehicles data up to September, so on and so forth.

Key Takeaways –

Real GDP Growth: At 9.2%, the real GDP growth rate for FY22 is slightly lower than most expectations, including RBI’s, which pegged it at 9.5%.
Aggregate GDP in FY22 is estimated to cross the pre-Covid level. This also holds true for the absolute level of Gross Value Added (GVA).

While the GDP maps the economy from the expenditure (or demand) side — that is by adding up all the expenditures, the GVA provides a picture of the economy from the supply side.
- GVA maps the “value-added” by different sectors of the economy such as agriculture, industry and services.
Role of High Inflation: For FY22, while real GDP (that is, GDP calculated using constant 2011-12 prices) will grow by 9.2%, nominal GDP (that is GDP calculated using current market prices) will grow by a whopping 17.6%.
- The difference between the two growth rates — about 8.5 percentage points — is essentially a marker of inflation (or the rate at which average prices have increased in this financial year).
Low Private Consumption: An analysis of the three main contributors to GDP — private consumption demand, investments in the economy, and government expenditures — shows that while the latter two are expected to claw back to the pre-Covid level, the first engine will continue to stay in a slump.
- Private consumption expenditures typically account for more than 55% of all GDP.