Drawing firm conclusions on GDP numbers based on NSO’s first advance estimates is tricky.
The 6.4% GDP growth estimate of the National Statistical Office (NSO) has drawn myriad responses on the state of the economy. It has now been used as a basis for conjecturing the final numbers which will come out in May. Several forecasters are talking of a scaling down of this number. At times there is a bit of an exaggeration with economists talking of a significant slowdown. A couple of points are relevant here.
The first is that after averaging 8% for the last three years, the growth number this year had to be lower and hence when the government stood by its forecast of 6.5-7% for the year and the Reserve Bank of India (RBI) lowered it to 6.6% in the December policy, it was expected. Therefore, slower growth was already a known fact and the number only was on the table for discussion. Now, the NSO has drawn up these forecasts based on extrapolations. Hence this is just an improvement over what it does at the beginning of the year when there is absolutely no data available and the forecasts are based on models which make several assumptions. This advance estimate is based on the knowledge of the first half of the year or eight months’ data for the variables involved. Therefore, it is not based on any specific collation of data from various entities. This year has been unusual as elections were held, which has held back spending by the government and had an impact on private investment too.
But such a forecast is necessary because it has to be used in drawing up the Budget. The revised fiscal ratios will be based on a revised GDP number in normal terms, which will be around `2 lakh crore lower than what was estimated at the beginning of the year. The past is important because for FY26, the GDP forecast has to be made. It can be around 10.5% again, which will then feed into the Budget model where tax ratios are juxtaposed with these GDP numbers.
The Excel files of economists have already run fresh forecasts based on the 6.4% number for both FY25 as well as FY26. The important question here is, how good are the first advance estimates of the NSO considering that they come when only nine months of the year are over and are available for an even shorter period?
To give us an idea, the table provides the forecasts for GDP at four points of time. There is a first advance estimate in January, followed by the second advance estimate in February and the provisional estimates out in May. There is also the ultimate number which comes with a lag of a year — which is what will be seen in any time series chart of India’s GDP growth rate.
The first thing that strikes the reader is that the final numbers tend to be at some variation with the earlier estimates. This means that while more data comes in and the assumptions or extrapolations are replaced with actual data, revisions would be made that can lead to different conclusions. In 2016-17 for instance, which was the year of demonetisation, growth was projected at 7.1% on three occasions but ended up at a high of 8.3%.
The final estimates have shown varying patterns compared with the first advance estimate. In four of the seven years, the final numbers were better including 2020-21 during Covid-19. On two occasions, it came in lower while it was spot on for 2022-23. Therefore, it would be hard to ascribe a direction for the final GDP growth numbers based on past data. This is because the revisions would be coming from different sectors at various points of time. Therefore, it may be difficult to assume that the final number will be better though it is tilted in this direction based on the seven observations.
In fact, even the May provisional estimate may not provide the certainty in the estimate as data is still in the process of being absorbed. In the last four years, the provisional estimates were better than the first advance estimates on three occasions.
Therefore, drawing any firm conclusions on the final GDP growth numbers based on the NSO’s first advance estimates is tricky. The economy has a very large unorganised sector on which data is not readily forthcoming, which leads to several imputations. The goods and services tax has brought about significant progress in terms of formalisation of the economy where several micro, small and medium enterprise (MSME) units have got registered. Similarly, borrowings by MSMEs from the financial system would entail providing data on their finances, which also helps in getting closer to their value addition to the GDP numbers.
It is not surprising that several forecasts have been lowered after the NSO brought out its first advance estimates. There is always a “follower” reaction whenever there is any estimate on growth by either the government, the NSO or the RBI. The rationale would be puzzling given that the economic environment prevailing till January was known and did not trigger any revision in forecasts or even overall view on the state of the economy. It would be of interest to see how the second advance estimates in February would view the economy.
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