The Truth About The $4-Trillion Economy: Free Press Journal NOvember 25th 2023

 

What matters for growth in any economy is real GDP growth which is expected to be 6.5% this year. Nominal GDP does not indicate the same because high inflation can push up this number and make things look very good

Even as the nation was shocked on November 19 when Australia overwhelmed India in the World Cup cricket finals, there was an interesting bit of news on social media which claimed that it was time to rejoice as India had crossed the $4 trillion mark in GDP. This news circulated quite widely and it was believed that the economy was truly accelerating, more so as there has been talk of India becoming a $5-tn economy with various timelines being put about.

Unverified Social Media Buzz

The news was evidently incorrect and was never verified, though the chart put made it look like a live ticker. There was some reference to the IMF to make it sound credible. It is hence necessary to put in perspective the numbers relating to GDP.

First it needs to be understood that GDP is not a market quantity like share or currency or bond where there are live tickers. It is a comprehensive calculation which is painstakingly carried out on a quarterly basis based on information feeds from various sources and a large number of imputations. Therefore, a real-time knowledge of GDP is impossible. This holds not just for India but all countries in the world.

Second, this information comes out on a quarterly basis two months after the quarter ends. Hence the information for Q2 of this year will be out on November 30. The annual number is announced on May 31 and hence the actual GDP number for FY24 will be known on that date only.

Official GDP Data and Forecasting

Third, no external organisation ever calculates the GDP of any country independently as they do not have the capacity to do so. They make forecasts or arrive at certain numbers by using official data and then making some changes based on their assumptions. Hence it would be incorrect to say that the IMF has similar numbers for India’s GDP at any point of time because it uses data that is provided by official sources.

Fourth, the National Statistics Office which comes under the Ministry of Statistics and Programme Implementation is the sole organisation that publishes this information and this is done four times a year. Therefore, any other number which is presented could at best be private forecasts but not the official position.

Now as to the number of $4 trillion of GDP, it would translate to roughly ₹332 lakh crore assuming an exchange rate of ₹83/$. In this context it is pertinent to state that this would be the nominal GDP, which is different from the real GDP which is reckoned at constant prices which means that inflation effects are removed. Therefore for FY23, real GDP was ₹160 lakh crore and nominal GDP ₹272 lakh crore. Hence when one is speaking of GDP crossing the $5 trillion mark (which is ₹415 lakh crore) or the $4 trillion mark or ₹332 lakh crore mark as was stated, it is the increase of nominal GDP of ₹272 lakh crore going up.

Official GDP Forecast for FY24 in the Budget

The official forecast made by the government on nominal GDP for FY24 is in the Budget for FY24 as this serves as the basis of all calculations. Here it was projected that growth would be ₹302 lakh crore. The numbers projected in the Budget are normally never off the mark and hence this would be the number attained by March 2024. This is ₹30 lakh crore short of the $4 trillion mark. Therefore, this number should be ignored.

But this will also bring into focus the $5 tn or $7 tn numbers being spoken of in various forums. Under normal conditions the nominal GDP grows at 12-13% per annum though there have been exceptional years as in FY22 and FY23 where growth was 18.4% and 16% respectively. This was due to very high inflation which hopefully is behind us. This means that assuming growth of 13% per annum we will take 2.5 years post FY24 to cross the $5 trillion mark — which is in FY27.

Real GDP Growth and Its Significance

In this context it is also necessary to reiterate that what matters for growth in any economy is real GDP growth which is expected to be 6.5% this year. Nominal GDP does not indicate the same because high inflation can push up this number and make things look very good as it was in the last two years. It is the real GDP growth number which leads to job creation and spending which is necessary to keep the tempo up. Therefore nominal GDP is more of a theoretical concept with limited use to describe what is happening in the economy.

However, nominal GDP becomes relevant when any economic ratio is calculated. This holds particularly for fiscal deficit and current account deficit. The former is a very critical ratio for all countries as it throws light on the fiscal situation as well as future buildup of debt. This ratio has to be controlled by all governments and as the fiscal deficit is denoted in current prices, the denominator also needs to be similar. The same holds for the current account deficit or any other external sector ratio like external debt or exports, where the nominal GDP matters.

Importance of Distinction Between Real and Nominal GDP

Hence the distinction between real and nominal GDP is essential. Further, these numbers are published only by the government department and no one else. This comes out four times a year with a two month gap. Any number on GDP during the course of the year is at best a conjecture based on subjective judgments. For sure, no one can give this number on a real time basis as it is never known!