GDP advance estimates may be cut to 8.6%, says India Ratings

The National Statistical Office’s (NSO’s) second advance estimates for FY22, due on February 28, may peg the current fiscal year’s real gross domestic product (real GDP) growth at 8.6 per cent, compared with 9.2 per cent projected in the first advance estimates, India Ratings said on Wednesday.

The reason for this likely downward revision, according to the ratings agency, is the recent upward revision in FY21 GDP contraction, to negative 6.6 per cent from negative 7.3 per cent.

“India Ratings’ estimate suggests that the second advance estimates may peg the FY22 real GDP growth at Rs 147.2 trillion. 

This would translate into a GDP growth rate of 8.6 per cent YoY for FY22 compared to 9.2 per cent forecast on January 7. The major reason for the likely downward revision in GDP growth is the upward revision of FY21 GDP to Rs 135.6 trillion in the first revised estimate of national income,” the agency said.

India Ratings said that according to the revised estimates, the GDP growth in FY20 now stands at 3.7 per cent compared to 4 per cent earlier. 

Furthermore, the GDP growth of FY19 remains the same at 6.5 per cent. 

The growth rates of GDP drivers from the demand side — namely, private final consumption expenditure (PFCE), government final consumption expenditure (GFCE) and gross fixed capital formation (GFCF) — have undergone a change.

“Due to these revisions, quarterly GDP growth numbers are also expected to undergo a change. As the FY20 GDP growth has been revised downwards, we now expect GDP growth of all the four quarters of FY20 to be lower than the present estimates. This would mean a likely upward revision of FY21 and downward revision of FY22 quarterly GDP numbers,” India Ratings said.

The agency’s estimate shows that GDP growth in Q1 and Q2 of FY22 may decline by 90-110 basis points than estimated earlier.

And, the figures in Q3 and Q4 of FY22 may come in at 5.6 per cent and 5.1 per cent, respectively. This is down from 6 per cent and 5.7 per cent estimated earlier.

“All this may appear quite confusing, but estimation of GDP is a fairly elaborate and time-consuming exercise. It takes about three years to finalise the GDP data,” the agency said.

The direction in revisions suggests that, generally, during the years of stable/upswing in GDP growth, advance estimate tends to underestimate the actual GDP growth rate. It does just the opposite during the years of downswing. 

This apparently happens because the first advance estimate of a particular fiscal year is based on the extrapolation of the select dataset of the previous year’s provisional estimates, the ratings agency said.

“However, we believe that the period considered is too short for arriving at a firm conclusion. This aspect needs to be studied for a much longer period, preferably 30 years. Also, growth revisions for the pandemic year such as FY21 should be viewed carefully and the exogenous shock, which the economy has faced, cannot be modelled/factored in any estimation process,” it said.