GDP Recovery

I: Due to COVID and global recession, the GDP of India is very low. We need to recommend steps to increase the GDP growth of the country. This need not be a long-term plan. We need immediate implementable steps. Our client is Ministry of Finance.

C: From the basic understanding of GDP, it is the total value of goods and services produced in a single year. Is it the right understanding?

I: Yes

C: I am considering the major contributing sectors as agriculture (20%), manufacturing (20%) and services (60%). Is it the right assumption?

I: Yes

C: As my first step, I would go for sectoral cuts, following which, I will go for identifying key growth drivers in each of the sectors. After that, I will look for ways of improving on these identified growth indicators.

I: Yes. Sounds alright.

C: I would like to begin with the agricultural sector. The net production of agriculture in terms of money value can be calculated by the formula (net cropped area in hectares) x (Kgs per hectare) x (Average price per kg). I would then move on and estimate the average prices for different crops. My primary considerations will be for perishable and non-perishable products. Can I go ahead with this assumption?

I: Okay. I want you to step back and look at the GDP through a formula and from the perspective of household and firms. (Hinting at the expenditure model of GDP).

C: From the household perspective, I can look at the amount of money that they spend in throughout the year. The total household spending in one year will give the GDP.

I: Lays down the formula for GDP = (Household expenditure) + (Exports-Imports) + (Government expense) + (Industry expenditure). Now you can proceed.

C: I would like to explore each of these heads and list down the scope for improvement under each of these heads. Starting from household expenses, we can divide it under needs and wants.   

I:  What do you mean by needs and wants?

C: By needs, I mean the necessary items purchased by them and wants, I mean the luxury items. 

I: You mean the discretionary expenses. 

C: Yes

I: Can you tell the formula of calculating the amount available for discretionary spending. 

C: Income- expenditure on necessary goods – savings

I:  You are missing one critical component. 

C: Is it the taxes?

I:  Yes

C: For increasing the household spending, I will focus on increasing the discretionary spend of the household. This can be done by providing rebates on taxes during the mid-year budget review. In addition to lower taxes, I will also suggest for a reduction in the savings interest rate of the banks, thereby encouraging people to spend more.

Moving on to the import and exports - for achieving a trade surplus, we can look at the currency value. 

I:  Do you think the currency should be devalued? 

C: Yes. This will attract exports. We can think about it. 

I:  Don’t you think that this will make the imports costlier?

C: The net impact will be positive. Majority of India’s import is oil based. With the demand slump in oil, imports will not be impacted much with devaluation of the currency and we can leverage on the increase of exports. Now I would like to focus on government expenditure.

I:  You can go for the industry expenditure.

C: The government is doing a lot of things to promote MSMEs in terms of proving cheap land, relaxed moratorium period, ease of GST filing etc. 

I:  But in the current times, if my factory is at 40% utilization, why should I invest more, despite incurring the losses?

C: Given the state of NPAs and demand slump in the economy, for utilization to increase, increased household spending holds the key. As additional measures, we can work on increasing the ease of doing business in the country. We can suggest on bringing foreign players by increasing the ease of getting approvals, bringing in single window entry system and removing other trade barriers. 

I:  Okay, that works. All the best for rest of the process.