Parsing through the GDP data

-23.9%.

By now most of us know this dreadful number. That Indian economy contracted by 23.9% in Q1FY21 (Apr-Jun, 2020) has been discussed ad infinitum in media (both social and otherwise) that you would be living under a rock or, I hope, in your own blissful world to have missed this. Even before the government and newspapers told us last week how bad the economy was, every expert worth her/his salt (including the ones on WhatsApp and other social media) had predicted a record dip in Q1 GDP. However, the actual performance belied even the most pessimistic projections. And so the announcement came as a nasty surprise to all and sundry.

For the record, till the last quarter Indian economy had never contracted since the government started reporting quarterly GDP data (which was almost a quarter century ago), let alone shrink by nearly a quarter (pun[s] unintended). Thrown in uncharted territory (and a deep red one), most of us did not know what to make of this data. And, like with most things we Indians do, we compared our performance with that of other major economies, to seek some solace. Alas, solace was not to be found so easily. The past few days have seen multiple interpretations of our performance and theirs. To recap, in case you have been smart enough to stay away from the debate, some say that India’s performance among major economies is the worst while others say US has performed worse than us. Despite the IMF Chief Economist wading into the debate and trying to put a lid on it, our disagreement continues.

It’s good the public is interested in economics, after all good economics can be good politics and aren’t we all interested in that. Unfortunately, stopping only at headline data is as good as being blind to data and makes for a lazy read at best and fatal interpretation at the worst. The negative 23.9 percentage is too seductive for people to close their eyes to the ‘build’ of this number. However, once you go past the trap of this percentage, a wealth of knowledge awaits.

With my limited understanding of economics but an ever-growing curiosity of data, I have tried to share some more data points for people to make a better assessment of the GDP picture.

So here’s the battery of questions for the inquisitive one.

What is this brouhaha about -23.9%?

Let’s start at the beginning. In absolute terms our GDP in Q1FY21 (Apr-Jun 2020) is Rs. 26.9 Trillion (1 Trillion = 1 Lac Crore, it has 12 zeroes in it). A decline of 23.9% means an erosion of INR 8.46 Trillion — we are lighter by Rs. 8,457,110,000,000 vs last year same qtr. The numbers are outrageously ginormous and so let’s take a moment for this to sink in.

Whoa, Rs 8.46 Trillion! But how does that affect me?

8.46 Trillion number does seem from a distant galaxy. Bringing this number closer home is a metric — GDP per capita* (GDP value divided by the population of the country). For Q1FY21, GDP per capita is Rs. 6.8K per month, down from Rs. 9.1K per month a year ago. Simplifying the argument, an average person who earned Rs. 9.1K/month last year (Q1, 2019) could earn only Rs. 6.8K/month this year (Q1, 2020). Now think of a household which would be earning something similar — it could be your driver’s or maid’s– think what this difference of Rs. 2.2K would mean to that household.

Now a GDP drop of 23.9% hopefully will evoke more a sense of regret than of comparison with other economies.

*GDP per capita isn’t same as the average income of a citizen, but is a fairly accepted measure for standard of living — and hence the above representation of data

That’s a surprising change in fortune, isn’t it?

While the 23.9% drop caught many by surprise, that should not have been the case considering that we had the longest and most stringent lockdowns across the world, that literally shut the economy down. You can’t slam the brakes hard and still be surprised when the car comes to a halt.

To refresh our collective memories, India entered April in a lockdown meant to end on 14th April, but which was extended multiple times till 31st May, with relaxation of select activities kicking in after 20th Apr. So out of the 91 days of the quarter, the nation was almost shut for 20 days, half shut for another 40 days — that’s 2/3rd of the whole quarter. And even the last 30 days the nation was still hobbling. With this context, a 23.9% drop isn’t a bolt from the sky.

So how bad is the situation?

To say that the economy is shitting bricks will not be out of place.

The number of -23.9% is a composite one — arrived by aggregating performances of the 4 different components which make up the GDP — (1) Private consumption (what you and I spend), (2) Business expenditure, (3) Government expenditure, (4) Net exports (Exports minus Imports). The first 2 components are a true reflection of confidence in economy — unfortunately they have fared far worse. Private consumption, which accounted for 56% of last year’s GDP, declined 27% in Q1, while Business expenditure (with 32% contribution) declined 47%. Taken together, these two components declined 34%.

Now, if it were not for the 16% increase in Government spends and some fortuitous circumstance where imports dropped more than exports, the economy would have seen a far worse no. It’s to be noted that Private Consumption and Business expenditure weren’t in the best of health last year as well (refer table in next question), so the drop in the current quarter isn’t an aberration and is likely to sustain much longer.

I have heard experts talk about a higher role for Government. Why did the Government not increase its spends at a faster clip than just 16% in the quarter?

I am sure the Government would have loved to drive up its spends to spruce up the GDP numbers, but it’s hands seem to be tied after excess spends (vs budget) in the last few years. Last year’s GDP growth was driven by higher Government spending as compared to Private consumption & Business expenditure. The economy hasn’t turned bad all of a sudden in the current quarter. It’s been anemic for a few years, and Government has been pumping money to stimulate it thus far. So come FY20–21 and the Government sees itself in a spot of bother where it doesn’t have resources to incur more expenditure. It can spend only if it borrows and that has far-reaching implications, making the Government a bit cautious. With a precarious situation like this, I guess the Government’s hand will be forced into bumping up its spends.

Please tell me some good news.

Well, there’s one bright spot. Agriculture has bucked the declining trend and grown at 3.4% in Q1. Now, agriculture accounted for only ~13% of GDP (in last year) — this lower contribution meant it lacked the firepower to drag Q1 GDP out of the abyss. However, agriculture is the biggest employment driver — with ~58% of India’s workforce affiliated to this sector. A positive growth trend, helped by merciful rains, should ensure that the rural economy doesn’t go in distress, not anytime soon.

So how will we revive the economy?

Well that’s for experts to diagnose & prescribe. Remember I am a guide in your data journey and not an expert!

Before we wrap up, sharing two of my favorite quotes on statistics/data that may bring a smile to you furrowed face :)

“Politicians use statistics in the same way that a drunk uses lamp-posts — for support rather than illumination” — Andrew Lang

“If you torture the data long enough, it will confess to anything” — Ronald H. Coase