Though there are differences as to what has caused it, but it is now almost a certainty the Indian economy – Asia’s third largest economy – will grow at a slower pace in current financial year 2017-18.
In last one year, several factors lead to this slowdown. Starting from global slowdown (adversely impacting our exporters), demonetisation, bad loans saddled banks, unutilised production capacity, low demand, and now uncertainty caused due to the new tax regime, the Goods and Services Tax (GST).
Irrespective of the reasons, a forecasted loss of one-two percent growth in GDP in rupee terms is significant.
There are two ways to measure GDP, the sum of all goods and services produced in an economy. (refer to the note below to understand what is GDP). The first one is to benchmark to a base price, say 2011-12, and convert all that is produced in 2017-18 to that price and see how much has it grown. The other is to measure GDP at current prices.
To measure the extent of loss, we considered GDP measured at current prices which was Rs 1,51,83,709 crore (Rs 1.52 lakh crore) for the year ended March 2017. We found,
One percent less growth is equal to Rs 1,33,471 crore.
And two percent growth is equal to Rs 2,70,291 crore.
Few analysts are projecting a 2% slowdown in growth in current financial year, and if that happens, we are looking at Rs 2,70,291 crore of lost growth. So how big is Rs 2.7 lakh crore?
22% of tax revenue
19 times of the health budget
8.7 times of the education budget
90% of spending infrastructure
(all for central government)
This is the money that would have gone into the hands of producers (who would have invested back for more) or to employees in the form of salaries (who would have demanded more cars and watched more movies) or to shareholders in the form of dividends (who would have saved more to invest in more companies).
And more importantly, with tax-to-GDP ratio of around 15% in India, the central and state governments would have garnered tax revenues.
If this is the cost due to demonetisation (the proof of is not yet firmly established), the benefits has to certainly exceed this to justify such a move.
Here’ a little primer on “What is GDP?”
GDP or Gross Domestic Product is economists’ way of adding all goods and services produced in a country. Take an example of an car manufacturer. He buys tyres, steel, electrical systems, brakes etc., from suppliers. Internally the car manufacturer makes engines and puts together the car and sells it to dealers who in turn sell it to end users.
Let’s say the value of all inputs used is Rs 2 lakh, and the car maker sells it for Rs 4 lakh to the dealer, and the customer pays Rs 4.2 lakh. GDP is not addition of Rs 2 lakh plus Rs 4 lakh plus Rs 4.2 lakh as this would mean double-counting. Only the value created at each level is added. The manufacturer takes Rs2 lakh worth of inputs and converts it into Rs 4 lakh worth of output, so value added is Rs 2 lakh. The break-up of value added will be like this:
- Input producers – Rs 2 lakh
- Car manufacturer – Rs 2 lakh
- Car dealer – Rs 0.2 lakh.