Sunday, December 20, 2015

[Editorial # 19] Shades of grey: The Indian Express

The mid-year economic review presented by Chief Economic Advisor Arvind Subramanian puts up a brave front by concluding that “prima facie”, economic growth is showing “signs of steady recovery”, but the data shared in the review paints a sobering picture. As against a real (after discounting for inflation) GDP growth of 7.5 per cent in the first half of the last financial year (2014-15), growth clocked just 7.2 per cent in the first half of this fiscal. The review claims that the real GDP growth for the full financial year 2015-16 will be between 7 and 7.5 per cent. The outlook for the next financial year, 2016-17, is not any better. To put these numbers in perspective, consider this: One, the real GDP of the country in 2013-14 (the last year of the UPA government) was 6.9 per cent. Two, in the economic survey, presented barely nine months ago, the CEA had given a growth outlook of 8.1-8.5 per cent for the current fiscal. In other words, not only has India’s growth decelerated from what it was in the same period of the last financial year, it is close to what it was around the time the NDA government took over. But even these headline GDP growth numbers mask the real economic and, indeed, political challenge that the Narendra Modi government now faces.

The disaggregated data shared in the review gives what it calls “mixed, sometimes puzzling, signals” about the health of the economy. For instance, if one looks at the indicators of finance, a gauge of economic activity, one finds that consumer credit has picked up, yet “industrial credit has slowed dramatically”. Similarly, while tax buoyancy is up, the growth of capital good imports, a proxy for the level of investment, has “decelerated sharply”. Such oddities are likely to further fuel the suspicion many have had about the veracity of the new GDP data, even though the CEA has tried to explain the possible reason for the measurement uncertainty plaguing the new GDP series.
The Indian economy is doing well for a car with only two wheels running. Compared to the boom years of 2004-11, neither exports nor private investments are contributing much to economic growth. As such, the economy is essentially being run on the other two wheels — private consumption and government expenditure. The trouble is, without adequate investment coming in soon, the consumption story will falter. The answer is in reforms that unleash the supply potential, like the GST, simpler labour laws and easier land acquisition, and in public expenditure in infrastructure that crowds in private investment. In the absence of these, the government will soon be forced to compromise on its fiscal deficit targets.


1. Who is Chief Economic Advisor? What is his role? How is he appointed?
2. Who is the current CEA?
3. Define the following terms: GDP, Real GDP, Capital Goods, Tax Buoyancy, Consumer Credit, Industrial Credit, Fiscal Deficit
4. What is understood by GDP growth rate? How is it calculated? Which authority is responsible for determining GDP and GDP GR for India?
5. What is the purpose of calculating GDP?
6. Which are the top 10 countries in GDP ranking?
7. What has been the GDP and GDP GR trend in India since independence?
8. Do you see any impact on GDP after the economic reforms of 1991? 
9. What measures are being suggested by the editor to improve the economy?
10. What are the Fiscal Deficit Targets set by India?


  1. 1. Arvind Subramaniyam is the 5th and incumbent Chief Economic Adviser of India. The CEA is responsible for analysis of the economy, and for advice on, and formulation of economic policy. He is also primarily responsible for the release and analysis of the Economic Survey, that is released just before the announcement of the budget in February.

  2. 3.GDP- is the total market value of goods and services produced within an economy over a period of time.
    Real GDP- the production of goods and services valued at constant price.
    Capital Goods- are goods that are used in the production of other goods.
    Tax Buoyancy- refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.
    Consumer Credit- credit given by shops, banks and other financial institutions to consumers so that they can purchase non-investment goods or services.
    Industrial Credit-or loans are offered by banks and other financial institutions to a business corporation and not an individual.
    Fiscal Deficit-refers to an economic condition wherein the government's expenditure exceeds its revenue.

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  4. The chief economic advisor (CEA) is the economic advisor to the Government of India and is appointed and remains under the direct charge of the Minister of Finance, Government of India. He is the ex-officio cadre controlling authority of the Indian Economic Service (IES).
    2. The incumbent Chief Economic Advisor is Arvind Subramaniam in office since 16th October 2014, and was preceded by Raghuram Rajan.
    3. GDP-Gross Domestic Product refers to the market value of all goods and services produced within a country in a specific time period, usually one annum or year. b) Real GDP refers to the total value of all goods and services produced within a country adjusted for inflation. c) Capital goods are defined as goods that are utilized in producing other goods rather than for consumer purposes. In other words capital goods are tangible assets that an industry or firm utilizes to produce other goods and services for eg office equipment, machinery , infrastructure etc.. Consumer goods are the end result of these production processes that utilize capital goods. d) Tax buoyancy is and indicator of the efficiency or responsiveness in revenue mobilization in response to growth in Gross Domestic Product. In other words, it measures how much tax revenues respond to an increase in economic growth or growth in national income. A tax is said to be buoyant if the revenue mobilized increases more than proportionately to the increase in economic growth or growth in GDP.

  5. e) Consumer credit refers to the funds borrowed by individuals or credit taken on by individuals to be used immediately i.e. for the purpose of purchasing a good or service. For example the use of lines of credit, credit cards and other small loans. For example if a person borrows money to buy a car or uses a credit card to buy a meal at a restaurant they are utilizing consumer credit.

  6. f) Any loan or credit provided to a corporate or industry and not to an individual for purposes of financing working capital needs or for financing long-term capital investments/requirements, are referred to collectively as industrial credit. They are usually short-term in nature and is mostly backed up with collateral.
    g) Fiscal deficit is the excess of government expenditure(spending) over government revenue( both direct and indirect).
    4. GDP growth rate is the measure of economic growth from one period to another expressed as a percentage of GDP and adjusted for inflation. It is expressed as real GDP growth rate as opposed to nominal growth rate. It is the rate of change in a nation's GDP from one period to another. The Central Statistics Office (CSO) under the Ministry of Statistics and Programme Implementation is responsible for measuring and publishing the calculations for GDP and GDP growth rate by coordinating with the state governments in collection and compilation of data for the same purpose.

  7. GDP is at the very basic level a measure of the health of the economy. It provides policymakers , economists and investors information as to whether the economy is contracting or expanding, will face a recession of inflation etc.. Such a measure of economic health enables policymakers and others to predict future turns the economy will take and therefore make requisite preparations to face such situations. This is essential to prevent large-scale unemployment, fall in wages, in production and a general decline in economic well-being of the populace.
    6. The top ten countries as per GDP ranking are : United States, China, Japan, Germany, United Kingdom, France, Brazil, Italy, India, Russia.

  8. In order to improve India's growth prospects, investment in capital needs to be boosted. For this to happen tax reforms, such as the GST must be implemented alongside simpler labor laws and public expenditure on infrastructure which will eventually crowd in private investment. This is absolutely essential since economic growth cannot rely solely on private consumption expenditure and government expenditure with long-term prospects in mind.