GDP growth plunges to 4.5%, the lowest since 2012

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

News: Growth in the gross domestic product (GDP) in the July-September quarter hit a 25­quarter low of 4.5%, the government announced on Friday.

Prelims and Mains focus: about the recent economic slowdown in the Indian economy, challenges and ways to address them; GDP v/s GVA

Context:

• The lowest GDP growth in six years and three months comes as Parliament has been holding day­long discussions on the economic slowdown, with Union Finance Minister Nirmala Sitharaman assuring the Rajya Sabha that the country is not in a recession and may not ever be in one.

• Growth in gross value added (GVA) also dipped to 4.3% in Q2 of 2019­20 from 4.9% in Q1, and 6.9% in the Q2 of last year.

Performance of various sectors:

• The manufacturing sector contracted 1% in the second quarter of the current financial year, compared with a robust growth of 6.9% in the same quarter of the previous year. The manufacturing sector saw an overall contraction of 0.2% in the first half (April to September) of the current financial year compared to a growth of 9.4% in the first half of last year.

• The agriculture sector saw growth coming in at 2.1% in second quarter of this year compared with 4.9% in Q2 of last year. The sector grew just 2.1% over the first six months of the year compared with 5% in the first half of the previous year.

• Among the services sectors measured, only the ‘Public Administration, Defence & Other Services’ category saw growth quicken in the second quarter of this year, to 11.6%, compared with 8.6% in the same quarter of the previous year.

• The ‘Financial, Real Estate & Professional Services’ category saw growth slow to 5.8% in Q2 of 2019­20, compared with 7% in Q2 of the previous year.

• Private final consumption expenditure, the closest proxy in the data to a measure of consumption demand, grew 5.06% in the second quarter of this financial year, compared with a growth of 3.14% in the first quarter. However, the growth in the second quarter this year is still significantly lower than the growth of 9.79% recorded in the second quarter of the previous year.

• Gross fixed capital formation (GFCF), which is a measure of the level of investment in the country by both the government and the private sector, grew only 1.02% in the second quarter of this financial year, compared with a growth of 4.04% in the first quarter, and drastically lower than the growth of 11.8% seen in the Q2 of last year.

Government’s take on the status of the economy

• Union Finance Minister Nirmala Sitharaman assured the Rajya Sabha that the country is not in a recession and may not ever be in one.

• The fundamentals of the Indian economy remain strong and GDP growth is expected to pick up from the third quarter of FY 2019­20.

• The International Monetary Fund has projected India’s GDP growth at 6.1% in financial year 2019-20 and 7% in 2020­21 in its October 2019 report.

GDP v/s GVA

GDP

• Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

• GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted)

• Thus the components of GDP are (C) plus Investment (I) plus Government Spending (G) plus BOP i.e. Exports minus Imports (X-M)

• GDP is calculated using this standard formula: C + I + G + (X-M).

• GDP is commonly used as an indicator of the economic health of a country, as well as to determine a country's standard of living

• Since the mode of measuring GDP is uniform from country to country, GDP can be used to compare the productivity of various countries

GVA

• The term that is used to denote the net contribution made by a firm is called its value added

• The raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’.

• Therefore the value added of a firm is, value of production of the firm – value of intermediate goods used by the firm.

• Gross value added (GVA) is defined as the value of output less the value of intermediate consumption.

• Value added represents the contribution of labor and capital to the production process.

• When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP).

• Thus, Gross value added (GVA) = GDP + subsidies on products - taxes on products

Note: GDP at factor cost = Gross value added (GVA) at factor cost GDP at market price = GDP at factor cost + net indirect taxes (indirect taxes- subsidies) GVA at factor cost = value of output (quantity * price) - value of intermediary consumption.