Nominal more important than real


The precipitous fall in 1QFY21 GDP has attracted attention of most people. The economic managers of the government have sought to pass 23.9% YoY contraction in real GDP as an exceptional event which is direct outcome of the global lockdown due to outbreak of COVID-19 pandemic.

Indubitably, the contraction is a non-recurring event and may not be a trend beyond FY21. Nonetheless, adjusted for lockdown also, the current slowdown does not appear be entirely cyclical. It certainly has some element of structural weakness in the economy.

We have highlighted this issue earlier also. In our view, the fall in nominal GDP is more worrisome than the real GDP. This fall has been more consistent and sharp in past 7 years. The nominal GDP growth rate has almost halved during FY13 and FY20.


For common man nominal GDP is more important because lot of variables like effective taxation, budgetary allocations for development and social welfare, subsidies, salaries of public servants, etc. are calculated as a factor of the nominal GDP. Lower nominal GDP essentially means, lower income for people and lower tax revenue for the government.

For example, the sharper fall in nominal GDP has resulted in sharper rise in effective rate of indirect taxes; which impacts the common people more, resulting in increase in income inequality and social injustice. 


Moreover, the public expenditure which has been supporting the GDP for past few years, will be constrained due to lower nominal GDP and therefore lower tax revenue. For key parameters of fiscal health, e.g., government borrowing, fiscal deficit etc., also nominal GDP is the denominator. A lower denominator would make fiscal health look weak even if deficit and borrowings remain the same in absolute terms.

Some other pointers to the non-cyclicality of the GDP slowdown could be listed as follows:

  1. Sales of commercial vehicle recorded negative growth in most of the previous 6 quarters. It continues to remain negative.
  2. Cargo and passengers handled at Airports recorded negative growth even in the 1QFY20.
  3. Manufactured product inflation has been below 2% for most of previous 6 quarters. This highlights lack of pricing power with the manufacturers. When juxtaposed with persistently low capacity utilization, it indicates that the pricing power may not return anytime soon and nominal GDP growth rate may continue to slide.
  4. Even after 22 years of NELP, we have not been able to significantly ramp up the local production of crude oil and natural gas. Even the coal imports have not seen any meaningful reduction.



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