On Tuesday, the National Statistical Office (NSO) released the first advance estimates of the national income that projected growth in India’s GDP at market prices for 2019-20 at 4.98% in “real” terms, the lowest since the 3.89% in the global financial crisis year of 2008-09. But even more significant was the estimated growth of 7.53% in “nominal” terms, which is the lowest since the 7.35% for 1975-76. Also, this is the first time since 2002-03 that nominal GDP growth has been in single digits.

What is nominal GDP and how is it different from real GDP?

GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products. The market value taken at current prices is the nominal GDP. The value taken at constant prices — that is prices for all products taken at an unchanged base year — is the real GDP.

Normal vs Real GDP Growth Rate of India 2001-2020

In simple terms, real GDP is nominal GDP stripped of inflation. Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year. Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.

But why should nominal growth matter at all? When we talk about “growth”, isn’t it a reference to how much real production is increasing?

In the normal course, real growth is what one would ordinarily look at. But the current fiscal year seems extraordinary because the gap between nominal and real GDP growth is just 2.6 percentage points. This is marginally higher than the difference of 2.5 percentage points in 2015-16. But in that year, real GDP growth was 8%, which translated into a nominal growth of 10.5%.

In 2019-20, not only is real GDP growth expected to be the lowest in 11 years, but also the implied inflation (also called GDP deflator, or the increase in prices of all the goods and services produced in the economy) is just 2.6%. Simply put, producers have not gained from either higher output or higher prices.

Households and firms generally look at the “topline” — how much their income has grown relative to the previous year. When that growth falls to single digits in a country like India, which has been used to a minimum 5-6% GDP increase year after year and an equal rate for inflation, it is unusual. Low nominal GDP growth is associated more with developed western economies.

Source: The Indian Express

Relevant for GS Prelims & Mains Paper III; Economics