GDP: The base matters but it is not the only thing that matters

Economic recovery is taking place: you can argue over its pace but denying it altogether is being wilfully blind.

Most of those who are either cheering or jeering at the recently released Q1 GDP data are missing the point. Most of them are economists.

Those who are cheering it are doing so because 20.1 percent sounds like a big, impressive number for GDP growth. Those who are pooh-poohing it are doing so because they say the high growth rate is due to the ‘base effect’. 

Both views are correct. But they are also mostly irrelevant because a high growth rate in itself doesn’t say much unless you know what the state of the economy was before. 

And those who talk about a low-base effect speak of it as if it implies no recovery has taken place at all. 

All forget that the base effect works both ways. Thus, while a low-base effect somehow makes high growth rates less credible the opposite is just ignored: it’s not fashionable to give any kind of allowance for lower growth rates that come on a high base. 

In short, the base matters but it is not the only thing that matters. 

Realistically speaking

Coming back to the GDP number, the number 20.1 percent doesn’t matter as much as the size of the economy in real terms. 

GDP in absolute terms in Q1 of this financial year was Rs 32,38,020 crore. That’s 90.8 percent of its size in the same period of the pre-pandemic year 2019-20. We lost two years to the pandemic. This sort of thing happens once in a while. Looking just at the numbers, doesn’t capture the traumas of jobs, livelihoods and lives lost. 

If you look at the sector-wise break-up, the comparison of the size of the economy yields more insights. Buoyed by benevolent rain gods, the agriculture sector is 108.2 percent of what it was pre-pandemic. That is, not only did it grow during 2020, it grew even faster this year. Manufacturing activity is nearly 96 percent of what it was in April-June 2019. Construction, too, has recovered but only 85 percent--which stands to reason because our construction industry is still highly labour intensive and labour-intensive sectors will always take the longest to recover in a pandemic, especially if you choke off-cash transactions. That’s why services have recovered only 87.5 percent . 

The government says it is going to have to look at these sectors particularly closely, but I can’t see any fix for it except vaccination--and a more benighted view of cash. 

Vaccination is a gigantic task so it is going to take another year at least to have 75 percent of the population double vaccinated. In the meantime the government can reduce its obsession--mostly for political reasons--that cash is bad.

Meanwhile, exports are almost 109 percent of what they were in April-June 2019, which is certainly remarkable. 

Another interesting fact is that private consumption--despite salary cuts and job losses--is 88 percent of its pre-pandemic level. 

This is likely to improve further in Q2, going by the news of re-hiring and rollbacks of salary cuts in the formal sector. The bulk of consumption is driven by these folk.

The point I am trying to make is that a low base effect is a purely statistical concept that people are applying to the real economy. 

There is indeed a recovery taking place. You can argue over whether it is as fast as it should be, but denying it altogether is being wilfully blind.

It’s ok for Opposition politicians to do so but when economists do it, they look silly.