Context: Recently, the first Advance Estimates was released by the National Statistical Office (NSO).

• According to MoSPI, India’s Gross Domestic Product (GDP) will grow by 9.2% in 2021-22.

First Advance Estimates (FAE) of Gross Domestic Product (GDP)

• The FAE were first introduced in 2016-17.
• It is published at the end of the first week of January, soon after the end of the third quarter (October, November, December).
• They are the “first” official estimates of how GDP is expected to grow in that financial year.
• They are also the “advance” estimates because they are published long before the financial year (April to March) is over.
• FAE do not include the formal third quarter GDP data, which is published at the end of February as part of the Second Advance Estimates (SAE).

Significance: They are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s budget allocations.

Key points
Real GDP Growth

• At 9.2%, the real GDP growth rate for FY22 is slightly lower than most expectations, including RBI’s, which pegged it at 9.5%.
• As things stand, aggregate GDP in FY22 is estimated to cross the pre-Covid level. This also holds true for the absolute level of Gross Value Added (GVA).

Role of High Inflation

• For FY22, while real GDP (that is, GDP calculated using constant 2011-12 prices) will grow by 9.2%, nominal GDP (that is GDP calculated using current market prices) will grow by a whopping 17.6%.
• The difference between the two growth rates about 8.5 percentage points is essentially a marker of inflation (or the rate at which average prices have increased in this financial year).

Low Private Consumption

• An analysis of the three main contributors to GDP: private consumption demand, investments in the economy, and government expenditures, shows that while the latter two are expected to claw back to the pre-Covid level, the first engine will continue to stay in a slump.
• Private consumption expenditures typically account for more than 55% of all GDP. As photo shows, its level is expected to stay substantially the 2019-20 level. Such weak levels of private demand will make it difficult to sustain economic growth in the months and years ahead.

How is FAE calculated?

• The FAE are derived by extrapolating the available data.
• The approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
• The estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.

Gross Value Added

• Gross value added (GVA) is defined as the value of output less the value of intermediate consumption.
• It is used to measure the output or contribution of a particular sector.
• When such GVAs from all sectors are added together and adding taxes (product) and reducing subsidies (product), we can get the GDP at market price.
• GVA thus shows the production contribution of a particular sector.

GDP vs GVA

• While the GDP maps the economy from the expenditure (or demand) side that is by adding up all the expenditures, the GVA provides a picture of the economy from the supply side. GVA maps the “value-added” by different sectors of the economy such as agriculture, industry and services.

By: Shubham Tiwari