Gross Domestic Product (GDP) Estimation in India
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India recorded real GDP growth of 7.8% during the April-June period of 2023-24.
Present GDP Calculation in India
• Real and Nominal GDP: The MoSPI calculates quarterly GVA (gross value added) at constant prices (2011-12) [Real GDP] and current prices [Nominal GDP].
• GDP Deflator: The ratio of Nominal GDP to Real GDP. It reveals the increase in GDP that has happened on account of higher prices rather than an increase in output.
GDP Calculation Approaches
• Production Approach: It sums the “value-added” at each stage of production.
• Income approach: It measures the total income earned by the factors of production.
• Expenditure approach: It measures the total expenditure incurred by all entities on goods and services. Due to variations in data collection and processing, there are often gaps between the three approaches, which is considered while making the final calculation.
GDP Calculation changes introduced in 2014-15
• In 2015, the Central Statistics Office (CSO) introduced the new series of national accounts statistics.
• The Base Year of the GDP Series was revised from 2004-05 to 2011-12. Base year is revised periodically to take into account the structural changes which have been taking place in the economy and to depict a true picture of the economy.
• The new series incorporates the latest recommendations of System of National Accounts, 2008, the international guidelines on compilation of national accounts.
Why GDP is not a Very Good Marker to Measure Development?
• It doesn't take into account externalities such as crime, pollution, inequality, and depletion of natural resources.
• It doesn’t measure aspects like Environmental protection, family bonding etc.
• GDP also includes socially negative activities if it generates economic output. E.g., the money spent on the repair work after the train crash is counted in GDP.
• Non-Inclusion of Social Aspects of people’s life such as state of health, quality of education, etc.
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National Multidimensional Poverty Index (MPI)
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NITI Aayog released a discussion paper titled ‘Multidimensional Poverty in India since 2005-06’. The paper uses National MPI for estimating Multidimensional Poverty. Key findings:
- Steep decline in Poverty Headcount ratio (H): 29.17% in 2013-14 to 11.23% in 2022-2023.
- 24.82 crore Indians escaped multidimensional poverty in the last 9 years.
- Intensity of Poverty is also declining, showing that the extent of deprivation among the deprived population is falling.
- The pace of decline in poverty headcount ratio was much faster between 2015-16 to 2019-21 compared to 2005-06 to 2015-16.
- Uttar Pradesh, Bihar, Madhya Pradesh, Odisha, and Rajasthan saw the fastest reduction in the proportion of multidimensional poor.
- All 12 indicators saw a statistically significant reduction. Cooking Fuel and Housing have the highest levels of deprivation, while Child & Adolescent Mortality, Electricity, and Bank Account have the lowest levels of deprivation.
- India is on track to achieve SDG Target 1.2 (reducing multi-dimensional poverty by at least half) much ahead of 2030.
About National MPI:
- First-ever National MPI was released in 2021 (based on data taken from NFHS-4).
- NITI Aayog is the nodal agency for MPI under the government’s Global Indices for Reforms and Growth (GIRG) initiative.
- Methodology used in Computing India’s National MPI (Alkire-Foster Methodology): It identifies people as poor or not poor based on a dual-cut-off counting method.
Sub-indices of the National MPI:
- Headcount ratio (H): Proportion of multidimensionally poor in the population.
- Intensity of poverty (A): Average proportion of deprivations experienced by multidimensionally poor individuals.
- MPI value is arrived at by multiplying the headcount ratio (H) and the intensity of poverty (A), reflecting both the share of people in poverty and the degree to which they are deprived.
Indicators in India’s National MPI:
- The model retains the 10 original indicators of the global MPI model and has added two (02) indicators, namely Maternal Health and Bank Account.
Global Multidimensional Poverty Index (Global MPI) 2023:
- Released by the United Nations Development Programme (UNDP) and the Oxford Poverty and Human Development Initiative (OPHI) since 2010.
- MPI tracks deprivations in 10 indicators across 110 countries.
- 1.1 billion people in 110 countries remain Multidimensionally poor.
- Nearly two-thirds of all poor people (730 Mn) live in middle-income countries, and low-income countries constitute only 10% of MPI.
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Direct Benefit Transfer (DBT)
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The government has saved Rs 2.73 lakh crore of taxpayers' money from 2014 to 2023 by adopting Direct Benefit Transfer (DBT) to send money to targeted beneficiaries and weeding out bogus accounts.
About Direct Benefit Transfer (DBT):
- Objective: Bring transparency and terminate pilferage from the distribution of funds.
- Launch: It was rolled out in 2013 in certain districts. Later, it was implemented across the country in 2014.
- Nodal Agency: DBT Mission, Cabinet Secretariat under Secretary (Co-ordination & PG). Disbursements are channelled through the Public Finance Management System (PFMS).
- Aadhaar Requirement: Aadhaar is not mandatory in DBT schemes. Since Aadhaar provides a unique identity and is useful in targeting the intended beneficiaries, Aadhaar is preferred, and beneficiaries are encouraged to have Aadhaar.
Key Enablers for DBT:
- JAM (Jan Dhan, Aadhaar, and Mobiles) trinity: Enabled transfer benefits in a leakage-proof, well-targeted, cashless, and timely manner.
- Business Correspondents (BC) Infrastructure: Ensure that payments are disbursed to the beneficiaries on time, at their doorstep, and of full value.
- Payments Bank: Increased the penetration level of financial services in remote areas of the country.
- Mobile money: Develop a comprehensive eco-system for cashless transactions over a mobile platform using Aadhaar as an identifier.
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Self Help Groups (SHGs)
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Recently, the Government announced that skill development training will cover two crore women under the 'Lakhpati Didi' scheme, which aims to encourage them to start micro-enterprises.
About Lakhpati Didi Scheme:
- Launched in 2023 by the Ministry of Rural Development.
- Objective: Enable rural SHG women to earn at least Rs.1 lakh per annum.
- Approach: It is based on a women-led development approach.
- Activities Covered: Women would be trained in skills like plumbing, LED bulb making, and operating and repairing drones, among others.
About Self Help Group (SHG):
- SHG is a village-based financial intermediary committee usually composed of 10-20 local women.
- It is voluntary in nature.
- India has around 1.2 crore SHGs, 88% of them all women based.
- SHG success stories include Kudumbashree in Kerala, Jeevika in Bihar, Mahila Arthik Vikas Mahamandal in Maharashtra, and Looms of Ladakh.
- Group responsibility: In an SHG, all members of a group take responsibility for a loan that an individual member takes.
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SHG Bank Linkages (SHG-BL) Project
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As per the Ministry of Rural Development, the Bank loans of about Rs. 7.68 lakh Crore have been accessed by SHGs as of November 2023 since FY 2013-14 under the SHG-BL Project.
About SHG Bank Linkages Project:
- It is savings-led microfinance model, launched by NABARD in 1992.
- Under this program, banks were allowed to open savings accounts, accessing credit at subsidized rates of interest for Self-Help Groups (SHGs).
- Components of SHG-BL:
- Training and sensitization of Bank Branch Managers.
- Training and positioning of Bank Sakhis at Rural Bank Branches.
- Initiate Community Based Repayment Mechanism (CBRM) at Rural Bank Branches.
- Credit Linkage of SHGs.
- Phased development of the programme:
- Phase I (1990-2005): NABARD acted as a catalyst and RBI allowed banks to lend to SHGs. However, lending was primarily subsidy-driven.
- Phase II (2006-2012): Strategic shift away from targeting individuals to group-oriented lending approach.
- Phase III (2012-present): Launch of DAY-NRLM with dedicated architecture and professional manpower support. Removal of capital subsidy and introduction of interest subsidy.
Related News
Microfinance in India:
- Recently, a report titled “Micro Matters: Macro View” was released by Microfinance Industry Network (MFIN).
- MFIN is an Association of Non-Bank Finance Company Micro Finance Institutions (NBFC-MFIs) established in 2009. It is an umbrella body of Micro Finance Institutions (MFIs) of the country.
- Microfinance refers to the financial services provided to low-income individuals or groups who are typically excluded from traditional banking.
- Key findings of the report:
- NBFC-MFIs followed by banks are the largest provider of micro-credit amongst other regulated entities.
- MFIs' gross Non-Performing Assets (NPA) decreased from 5.6% (FY22) to 2.7% (FY23).
- The share of East and Northeast states fell to 34.9% from 37.7% from last year.
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State Finances
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Recently, the Reserve Bank of India published an annual report titled “State Finances: A Study of Budget of 2023-24”. The theme of the Report is ‘Revenue Dynamics and Fiscal Capacity of Indian States’.
Key Findings of the Report:
- Capital outlay is budgeted to increase by 42.6% in 2023-24 to 2.9% of GDP.
- Debt-GDP ratio of states declined from 31% at end-March 2021, to 27.5% by end-March 2023, supported by fiscal consolidation.
- States’ consolidated gross fiscal deficit to gross domestic product (GFD-GDP) ratio declined from 4.1% in 2020-21 to 2.8% in 2021-22, led by a moderation in revenue expenditure, and an increase in revenue collection.
- Increased Tax Buoyancy with implementation of Goods and Services Tax (GST).
- Tax Buoyancy refers to the responsiveness of tax revenue receipts to changes in national income.
- Tax buoyancy greater than 1 signifies that tax revenues grow at a faster rate than the growth in national income.
N K Singh Committee Recommendations:
- The combined debt-to-GDP ratio of the centre and states should be brought down to 60% by 2023 (comprising of 40% for the Centre and 20% for states).
- The committee suggested incorporating "escape clauses" that allow deviation from the fiscal targets under specific circumstances, such as national security, acts of war, national calamities etc.
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States’ Capital Expenditure
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The Department of Expenditure, Ministry of Finance has approved capital investment proposals of Rs. 56,415 crores in 16 States under the ‘Special Assistance to States for Capital Investment 2023-24’ (Union Budget 2023-24).
About the Scheme:
- Genesis: Similar scheme was first instituted in 2020-21 in the wake of the COVID-19 Pandemic.
- Objective:
- To boost to capital spending by States.
- To have a higher multiplier effect of capital expenditure.
- Assistance: 50-year interest-free loan up to an overall sum of Rs. 1.3 lakh crore to the States.
- Parts: Total 8 parts, Part-I (general allocation) has the largest allocation i.e. 1 lakh crore. Other parts are either linked to reforms or are for sector-specific projects.
Trends in Capital Expenditure (Capex) by States:
- Capex growth remained the same in FY23 compared with 29% growth in FY22.
- Capex also known as Capital expenditure is the part of the government spending that goes into the creation of assets like schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and seaports.
- Capex Target: According to a study by the Bank of Baroda, 25 states have cumulatively achieved 76% of their capex target in FY23.
- Capital outlay-GDP ratio: The States’ Capital outlay-GDP ratio is expected to improve from 2.3% in 2021-22 to 2.9% in 2022-23.
Centre’s Support to States to Increase Capex:
- Early Release of Funds: The Centre has also been releasing tranches of tax devolution early to help states front-load capex rather than wait till the end of the fiscal.
- The Central government has regulated states’ borrowings under Article 293 of the Constitution from FY23. The Centre tightened borrowing norms for the states by including off-budget liabilities as part of the states’ annual net borrowing ceiling.
- Production-Linked Incentive (PLI) scheme: It is providing capital expenditure-linked incentives to 14 key sectors.
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Public Debt
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The International Monetary Fund (IMF), in its annual Article IV consultation report has highlighted that India’s public debt to GDP ratio at the general government level has barely increased from 81% in 2005-06 to 84% in 2021-22 and back to 81% in 2022-23.
More on the news:
- Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
- The report suggests that Indian Growth is expected to remain strong, supported by macroeconomic and financial stability.
About Public Debt:
- Public Debt denotes liabilities payable by the Central Government, which are contracted against the Consolidated Fund of India, as provided under Article 292 of the Constitution of India.
- Current Status of Public Debt in India:
- Central Government’s Public Debt stood at 57.1% of GDP as of the end of March 2023.
- General Government Debt was 81% of GDP in 2022-23.
- General Government Debt represents the indebtedness of the Government sector (Central, State Governments and UTs with legislature).
- Internal Debt constituted 94.6% of Public Debt at end-March 2022.
Reasons and Implications of High Public Debt:
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Implications |
- Fiscal stimuli to support the economy during the Covid-19 pandemic.
- India has been investing significantly in infrastructure projects to support economic growth.
- Extensive social welfare programs without corresponding revenue streams can lead to increased borrowing to fund these programs.
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- Increased costs of servicing interest debt.
- Limits fiscal resources for meeting emerging priorities, like climate change adaptation, green transition etc.
- High-interest payments account for 5% of GDP (in India), roughly twice the emerging market and developing-country average.
- Leads to a Crowding out effect i.e., a reduction in private investment spending due to increased interest rates.
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Related News: World Bank’s Report on External Debt
- World Bank releases its annual International Debt Report (IDR), 2023.
- The report analyses external debt statistics for 122 low- and middle-income countries (LMICs).
- Key Highlights:
- Historic rise in debt: Public and publicly guaranteed (PPG) debt service payments by LMICs totaled US$443.5 billion in 2022.
- Debt Service cost: Due to rising interest rates and unfavourable exchange rate movement, servicing external debt could become burdensome.
- India’s debt service was 2% of the GNI in 2022.
- Crowding out of priorities: Debt servicing could crowd out spending on other development priorities (health, education, etc.).
- Outflow of money: Due to a tighter monetary policy in advanced economies, investors found attractive returns in US and European bond markets.
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Off-Budget Borrowings
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Centre for Social and Economic Progress (CSEP) recently released a report on ‘Off-Budget Borrowings (OBB)’ by Indian Governments.
About OBBs:
- OBBs refer to borrowings that are not reflected in the budget, even though budgetary resources will have to be used for their repayment.
- OBB is not part of the calculation of the fiscal indicators despite fiscal implications.
- OBBs are taken not by government directly but by another public institution on its direction.
- For example, loan by FCI for paying food subsidy bill (this practice is discontinued from FY 2020-21).
Reasons for Resorting to OBB:
- Bypass Fiscal Deficit targets under the FRBM Act, 2003.
- Avoid borrowing limits under Article 293 (3) of the Constitution.
- Avoid delay in central grants, or reduction in other sources of revenue.
Implications of High OBB:
- A hidden liability that may lead to a debt trap for the government.
- Adversely affects the accountability as it is generally scrutinized.
Methods of OBB:
- National Savings Schemes
- Government Fully Serviced Bond
- Domestic /Foreign Market borrowings, etc.
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Current Account Deficit (CAD)
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The CAD widened to $9.2 billion from $1.3 billion in Quarter 1 of Financial Year 2024. Although, later it declined to 1% of gross domestic product (GDP) in Quarter 2 (2023-24).
About Current Account Deficit (CAD):
- Balance of Payments (BoP) records the transactions in goods, services, and assets between residents of a country with the rest of the world for a specified time period typically a year.
- Current Account is one of the two accounts in the Balance of Payments (BoP). It records exports and imports in goods and services and transfer payments of a country.
- Transfer payments are receipts received by the residents ‘for free’, without any present or future payments in return. It includes remittances, gifts, and grants.
Reasons behind India’s increased CAD:
- Higher trade deficit: Increased imports and decreased exports have contributed significantly to the widening of CAD.
- Services Receipts Decline: Net services receipts decreased, primarily due to reduced exports of computer, travel, and business services.
- Impact of Global Factors: Slowing global growth has implications for India's export-oriented services and remittances, adding to the challenges in maintaining a lower CAD.
- Rising Oil Prices: Anticipated increase in oil prices is expected to further widen the merchandise trade deficit. Higher oil prices contribute to increased import costs, affecting the overall CAD.
- Foreign Direct Investment (FDI) Decline: Net FDI declined in the financial account, influencing the overall balance.
Potential threats from increasing CAD:
- Foreign investment: Pull out of foreign institutional investors or limited capital flow.
- Exchange Rate: High Current Account Deficit for a long term decreases the global demand of the currency and can lead to a situation of free fall in currency exchange rate.
- Inflation: Price instability in turn fuels inflationary concerns, leading to further reduction in domestic savings, leading to lower investments or foreign borrowing to fund growth needs.
- Payment imbalances: They can lead to a BoP crisis as was observed in the Asian Financial Crisis (1997) and the recent Sri Lankan crisis.
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Dated Securities
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The Centre will borrow ₹6.55 trillion from the market for the second half of the ongoing financial year. This market borrowing will finance the government's budgeted fiscal deficit of 5.9% of GDP.
What are G-Secs?
- G-Secs are tradeable instruments issued by the Central Government or the State Governments which acknowledges the Government’s debt obligation.
- G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
- Dated G-Sec’s are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on half-yearly basis.
- Generally, the tenor of dated securities ranges from 5 years to 40 years.
Other Types of G-Secs:
- Treasury Bills (T-bills): These are short term debt instruments issued by the Centre in three tenors, namely, 91 day, 182 day and 364 day. They are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
- Cash Management Bills (CMBs): CMBs are similar to T-bills but are issued for maturities less than 91 days.
- State Development Loans (SDLs): SDLs are dated securities issued through normal auctions by the State Governments similar to Dated G-Secs.
How are the G-Secs issued?
- Mechanism: G-Secs are issued through auctions conducted by RBI on its electronic platform called the E-Kuber.
- Participation: Commercial banks, Scheduled Urban Cooperative Banks, Primary Dealers, insurance companies and provident funds who maintain funds account (current account) and securities accounts with RBI, are members of E-Kuber and take part in the auction. Foreign Portfolio Investors (FPIs) and Corporates are also allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time through Scheduled Bank or a Primary Dealer or Specified Stock Exchange.
- The RBI conducts Open Market Operations (OMOs) by way of sale or purchase of G-Secs to or from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
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