Divergence between GVA and GDP in Second Advance Estimates, 2020-21

There were reports in media also on the divergence between GVA and GDP. This piece attempts to clarify some of the apprehensions expressed in certain quarters.    

Divergence between GVA and GDP in Second Advance Estimates, 2020-21
Mr. Kshatrapati Shivaji, Secretary, Ministry of Statistics and Programme Implementation. The views expressed are Personal

New Delhi: Subsidies are intrinsically embedded in development construct especially in a developing economy. Subsidy is one such market intervention that can be used for the desired allocation of resources to enhance welfare focus. 

Role of subsidies get further enhanced in managing the pandemic. As a result, the quantum of subsidies in the current year budget of the GOI has increased significantly to achieve inter alia objectives of ensuring supports to needy and also to wipe out accumulated outstanding off-budget subsidies extended for the food, fertiliser, and fuels. The increased subsidies are also intended to improve transparency of the budget. However, the increase in budgetary subsidies during the ongoing pandemic has altered the historical incidental balance between GVA and GDP. In the past, it has been found that on rare occasions, the GVA growth was lower than GDP. 

There were reports in media also on the divergence between GVA and GDP. This piece attempts to clarify some of the apprehensions expressed in certain quarters.    

The National Statistical Office (NSO) released the Second Advance estimates (SAE) of Gross Domestic Product (GDP) for the year 2020-21 along with the estimates of Quarter 3 on February 26, 2021. The First Advance estimates (FAE) for 2020-21 were earlier released on January 7, 2021. While the Gross Value Added (GVA) estimates showed a considerable improvement in 2020-21 from the projections made available earlier through FAE (-7.0% to -6.5%), there was a dip in the annual estimates’ growth of GDP (from -7.7% to -8.0%).

The improved performance of the indicators used in compilation of GVA is attributed to calibrated and steady opening of the economy along with the policy measures taken by the Government.

As such, the First Advance Estimates (FAE) were first introduced in 2016-17, primarily to serve as essential inputs to the Budget exercise, when the budget date has been predated on February first from the end of February. However, FAE is based on very limited data. The issue of limited data has further been accentuated this year owing to the pandemic led fluctuations urging the NSO to look at alternative data sources and methodology. 

Needless to say, with improved data availability during subsequent revisions, estimates become more accurate. Advance estimates of GDP are compiled using the benchmark-indicator method i.e. the estimates available for the previous year are extrapolated using the relevant indicators reflecting the performance of sectors. 

Thus, variations in SAE from FAE is attributed to revision of benchmark estimates (First revised Estimates of GDP 2019-20 released on 29-01-2021) and additional data availability on various indicators like CPI, IIP, Revised Estimates of fiscal data, financial results of listed companies etc.

GDP is derived as the sum of the gross value added (GVA) at basic prices, plus all taxes on products, less all subsidies on products.

GDP = Total GVA at Basic Prices + (Product Taxes – Product Subsidies)

Thus, any fluctuation in the product taxes and product subsidies has an impact on GDP. 

One of the notable initiatives taken by the Government to address the pandemic led crisis has been to provide free supply of food rations to the most affected population. In order to meet this requirement, the Government has enhanced the food subsidy provision significantly in the Revised Estimates of 2020-21. The additional provision included the loan component of previous years (pre-payment of NSSF loans that are outstanding with Food Corporation of India (FCI)).

The loan component of previous years and precise food subsidy provision pertaining to this year were calculated, which were then used in SAE after according suitable economic treatment as detailed in System of National Accounts (SNA) 2008. The high food subsidy provision even after adjusting for past years’ arrears has led to the divergence between GVA and GDP for 2020-21.

While the increased food subsidy may be attributable across quarters, absence of accrual accounting system makes it difficult to apportion it among the quarters of 2020-21.

However, these are early projections. Improved tax collections in the following months, performance of various indicators, actual allocation of subsidies and other measures taken by the Government, would play an important role in the compilation of Q4 GDP estimates and the annual estimates of GDP 2020-21.

To meet the crisis inflicted by the pandemic, most countries have taken several measures. In India too, the Government has taken a lead role and has announced numerous policy measures from providing the most vulnerable with daily food rations to postponing some deadlines for compliance and tax filings. In order to meet the additional requirement of food rations, the Government has enhanced the food subsidy provision significantly in the Revised Estimates of 2020-21 which was also mentioned in para 3 of the Press release of MOSPI (26-02-2021). Clarifications provided by International agencies like IMF, EUROSTAT etc. on treatment/economic classification of various measures provided by the Governments to meet the crisis are also considered while compiling the estimates. Provisional GDP estimates of 2020-21 and Q4 are due for release on May 31, 2021.

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