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Indian Economy

Sharp Economic Recovery

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  • 02 Sep 2021
  • 5 min read

Why in News

Recently, the National Statistical Office data has revealed that the Indian economy grew at a record pace of 20.1% in April-June 2021, as compared to the corresponding period last year.

  • Last year, Gross domestic product (GDP) contracted 24.4% in the same period, when the national lockdown due to the Covid-19 pandemic had nearly halted all economic activities.

Key Points

  • About Economic Recovery:
    • The first quarter’s high growth rate, has come despite a brutal second wave of the pandemic which peaked in April-May 2021.
    • The sharp increases were largely due to the low base (-24.4%) of the first quarter of 2020-21.
    • This growth reaffirms the government’s prediction of an imminent V-shaped recovery made last year.
    • However, despite phenomenal economic recovery, the GDP in the first quarter is still 9.2% lower than the GDP in the same period during the pre-Covid year 2019-20.
    • Amongst sectors, manufacturing and construction imparted a significant push to the economy in April-June, growing 49.63% and 68.3% respectively, over April-June 2020.
      • However, the services sector continued to lag.
    • Sectors including ‘agriculture, forestry and fishing’ and ‘electricity, gas, water supply and other utility services’ are above the levels of the pre-Covid year of 2019-20.
  • V-shaped Economic Recovery:
    • A V-shaped recovery is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
    • Such recoveries are generally spurred by a significant shift in economic activity caused by rapid readjustment of consumer demand and business investment spending.

Measuring Total Output of Economy

  • Total Output in an economy can be measured by two ways:
    • Measuring total demand: Gross Domestic Product (GDP)
    • Measuring total supply: Gross Value Added (GVA)
  • About GDP:
    • It is the total monetary value of final goods and services, those that are bought by the final user and produced in a country in a given period of time.
    • The GDP data show what is happening to the four engines of economic growth in any economy. These four engines are:
      • Private Final Consumption Expenditure (C)
      • Investment (I)
      • Government Final Consumption Expenditure (G)
      • Net Exports” (NX) (Exports-Imports)
    • GDP = C + I + G + NX
  • About GVA:
    • It looks at how much value was added (in money terms) in different productive sectors (such as Agriculture, Electricity, etc.) of the economy.
    • It tells which specific sectors are doing well and which are struggling to add value.
  • Difference Between GDP And GVA:
    • On the face of it, the total output should be the same in the case of measuring Total Demand or Total Supply.
    • However, every economy has a government, which imposes taxes and also provides subsidies.
    • As such, GDP is “derived” by taking the GVA data and adding the taxes on different products and then subtracting all the subsidies on products.
    • In other words, GDP = (GVA) + (Taxes earned by the government) — (Subsidies provided by the government).
    • The difference between these two absolute values will provide a sense of the role the government played.
      • If the government earned more from taxes than what it spent on subsidies, GDP will be higher than GVA.
      • If, on the other hand, the government provided subsidies in excess of its tax revenues, the absolute level of GVA would be higher than the absolute level of GDP.

Source: IE

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