First Advanced Estimate (FEA) of GDP and GDP CALCULATIONS

Recently, the 1^st Advance Estimates (FAEs) released by the government showed that India’s GDP will grow by 7.3% in the current financial year (2023-24), slightly faster than the 7.2% growth in 2022-23.

What is GDP?

Gross Domestic Product – GDP is defined as total market value of all final goods and services in an economy.

• It is used to assess the size of economy and the country’s performance can be measured across years.
• Growth of GDP can be either due to increase in actual production or due to increase in prices of goods and services or combination of both.

Nominal GDP – It is the value of GDP at the current prevailing prices.

Real GDP – It is the value of GDP at some constant set of prices which is calculated by removing the effects of price inflation from the nominal GDP by using a GDP or price deflator.

• Since these prices remain fixed, if the Real GDP changes, then it is due to the changes in volume of production.
  • Real GDP growth rate = Nominal rate – Inflation (GDP Deflator)

GDP deflator – It is the ratio of nominal to real GDP which gives us an idea of how the prices have moved from the base year to the current year.

• • GDP Deflator = GDP/gdp         (GDP – nominal GDP; gdp – real GDP)

Base Year is the year whose prices are being used to calculate the real GDP. In 2015, India’s Central Statistics Office (CSO) introduced a new series which revised the base year from 2004-05 to 2011-12.

Gross National Product (GNP) takes into account the value of economic activities of those who are not residents of the country as well.

GNP = GDP + Net Income Property from abroad

What is contributing to India’s growth?

GDP is calculated by 3 different methods.

• GDP calculation in India – Calculated through income method and expenditure method.
• Data released by – National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI).

4 main engines of GDP growth – On basis of demand side.

• Private Final Consumption Expenditure (PFCE) – It is the spending by people in their individual capacity that accounts for almost 60% of India’s GDP.
• Gross Fixed Capital Formation (GFCF) – It is the spending towards investments in boosting the productive capacity of the economy which typically accounts for 30% of the GDP.
• Government Final Consumption Expenditure (GFCE) – It is the spending by governments to meet daily expenditures such as salaries which accounts for around 10% of GDP.
• Net exports – It is the net spending as a result of Indians spending on imports and foreigners spending on Indian exports.
• Since India typically imports more than it exports, it drags down GDP calculations, and shows up with a minus sign.
• As such, negative growth rates here are a good development and for the current year, this drag effect has grown by 144%.

What are Advance Estimates of National Income?

• They are indicator-based and are compiled using the benchmark-indicator method, i.e. the estimates available for the previous year (2022-23) are extrapolated using the relevant indicators reflecting the performance of sectors.
• Compiled by –MoSPI
• 1^st Advance Estimates (FAE) – They are presented at the end of the 1^st week of January every year, the 1^st estimates of growth for that financial year.
• Calculation of FEA – Based on the performance of the economy over the 1^st 7-odd months, and the data are extrapolated to arrive at an annual picture.
• Significance of the FAE – They are the last GDP data released before the Union Budget of any financial year and it constitute the base for the Budget numbers.

Union Budget is presented on February 1 every financial year. In the year of Lok Sabha elections like in 2024, a full-fledged Union Budget will not be presented.

Findings of FEA – By the end of March 2024, India’s GDP is expected to rise to almost Rs 172 lakh crore and on an annual basis, the growth rate estimated for 2023-24 is 7.3%.

2nd Advance Estimates – It is released by the end of February every year.

Provisional Estimates – It is released by the end of May.

Revised Estimates – The GDP estimates continue to be revised and in the coming 3 years, the 1^st, 2^nd, and 3^rd Revised Estimates of this year’s GDP will be released.

Actuals – It is the final number of GDP.