Whatever the calculation, India's Q1 GDP contraction is severest among all

Irrespective of whether it is sequential or year-on-year, the inference remains the same; South Africa's 50% contraction is "annualised" and is incomparable to India's 24% fall

India's economy shrank 23.9 per cent in the first quarter of 2020-21 over the same quarter of the previous year.  

A few days prior to the release of India's data, it was reported that the US economy had plunged 34.3 per cent in the very same quarter. A few days later the news was that South Africa's economy had shrunk by 50 per cent. 

This gave rise to a debate about whether India's economy shrank at the fastest pace, or had that dubious distinction gone to US or South Africa.

However, there shouldn't have been any confusion, as various economies use different methods to calculate GDP. As IMF's chief economist showed by putting all economic growth rates on the same yardstick of quarter-on-quarter, non-annualised method, India's economy contracted the most, at 25.6 per cent in the April-June quarter of 2020-21. The US economy shrank 9.1 per cent based on this method. 

At that time South Africa's data had yet not come in. Even if that country's data is considered, the conclusion will be the same as above since South Africa's economy shrank by 14.2 per cent in the same period using Gita Gopinath's method. 

Various methods to calculate GDP:

The formulation or estimation of gross domestic product is done by two ways in most economies: from expenditure data, by adding investments, consumption and net exports, and from the supply side, by adding gross value added in all sectors of the economy to net indirect taxes earned by the government. 

The numbers from these two methods differ only slightly, and can be considered to be equal. Most countries are on the same page when it comes to this, and they differ only in nomenclature. 

Similarly, they all calculate the GDP in (a) current prices, and (b) constant prices with a certain reference year. The latter is referred to as GDP in “chained volume measures” in several economies.  

But while calculating the growth rate with respect to a reference period, there are again two ways of doing it, and in that, all the countries differ substantially from each other, with no uniformity in the measurement and presentation. 

Most western countries such as the US, Germany and UK take the growth as the GDP in a quarter with the “previous quarter” as reference. They consider the financial quarter as one-time unit of the economy, and calculate and frequently use the GDP growth “over the previous quarter”. 

Most emerging economies, such as India and Brazil, use the same quarter of the previous year as the reference. Countries like Spain and Italy specify both, (a) growth over the previous quarter and (b) growth over the same quarter of the previous year when they release the quarterly GDP estimates. 

But there are some countries who go one step further. Take the example of the US. It gives the GDP growth estimate by performing annualisation over the quarterly GDP growth. But what is annualisation? 

It is essentially compounding the quarterly growth for the subsequent (remaining) quarters in the financial year. For example, if the GDP has contracted 10 per cent in Q1-2020 over Q2-2019. Annualisation considers a contraction of 10 per cent in Q2-2020, a further fall of 10 per cent in Q3 and then another 10 per cent in Q4. 

Then, when we get an estimate for all the four quarters, the US Bureau of Economic Analysis calculates the annual GDP growth rate. Calculating the growth for full year when data for limited quarters is available is annualisation. 

A question of methodology

Which method is most appropriate in a Covid-like situation from India's standpoint?

When posed with this query, former chief statistician Pronab Sen said he opted for the quarter-on-quarter non-annualised and the year-on-year that India officially follows. 

He said QoQ non-annualised is better under these circumstances than QoQ annualised. 

"The reason for that is this is a shock. It is not a trend. The annualised figure is something that looks like cyclical change. Then it is fine. When it is a shock and you can actually pinpoint the date of the shock, then annualisation is a bad idea. What annualisation means is the same shock will occur quarter after quarter," he explained his views. 

Based on the quarter-on-quarter non-annulised method, India's GDP at current prices declined 28.5 per cent in the first quarter of 2020-21. Sen said this shows that the income of Indians declined by 28.5 per cent in the April-June quarter over the previous quarter. 

"That is important information because it tells you how much Indians would cut back on both consumption and savings, as they have to meet the 28.5 per cent gap. So either they have to cut back on consumption by 28.5 per cent, which is impossible, or they have to reduce savings significantly. So they would resort to some combination of both these measures," Sen said. 

This 28.5 per cent contraction is quite a scary number, said Sen.  

Devendra Pant, chief economist at India Ratings, said the official year-on-year non-annualised method is the most appropriate in the context of India and in Covid like situation. 

He attributed his view to the seasonality factor in India. For instance , he said "shraadh" (hindu ritual to pay homage to one's ancestors) is currently on. Generally, 'navraatri'  begins once 'shraadh' ends and people start shopping. However, due to "adhik maas" (the extra month in the Hindu calendar that is inserted to keep the lunar and solar calendars aligned), many people who believe in these would refrain from purchasing for a month.   

Pant also criticised the comparisons being made to show that India's economy contracted at the fastest pace or not. 

"How will we be better off if we assume India's GDP contraction was not at the fastest pace in the world," he wondered. 

The simple point is it was a 23.9 per cent contraction in GDP in Q1 of FY21. This is the first time that India's economy contracted since the quarterly estimates that are available from FY98. 

"If you look at yearly estimates, the biggest contraction in the past was 5.2 per cent. We're going to see a contraction which will be at least twice that. I am more concerned about that. Whether some other economy contracted more than India or not, how does it matter to us," he emphasised. 

India Ratings recently raised its projection for the contraction of India's economy to 11.8 per cent in the current financial year from the earlier forecast of 5.3 per cent. 

Table: India’s economic contraction actually the severest In the world

Quarterly GDP growth primarily based on two methods: sequential, and year-on-year growth. For some countries, “annualised” growth for the two types is available
Country	QoQ non-annualised	QoQ annualised	YoY non-annualised	YoY annualised
India	-25.6	.	-23.9	.
Spain	-18.5	.	-22.1	.
UK	-20.4	.	-21.7	.
Mexico	-17.1	.	-19.0	.
France	-13.8	.	-18.9	.
Italy	-12.8	.	-17.7	.
South Africa	-14.2	-16.4	-17.1	-51.0
Singapore	-11.8	.	-13.2	.
Canada	-11.5	.	-13.0	.
Germany	-9.7	.	-11.3	.
Japan	-7.8	-28.1	-9.9	.
Turkey	-11	.	-9.9	.
USA	-9.1	-31.7	-9.1	.
China	12.3	.	3.2	.

Source: Official national accounts repositories of all countries