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$5 trillion GDP target to take 4 years longer as nominal growth drops to 6.1% in Q2

This drop in nominal GDP growth rate is significant as it also upsets the government's fiscal estimates in the current financial year

twitter-logo Dipak Mondal        Last Updated: November 30, 2019  | 13:13 IST
$5 trillion GDP target to take 4 years longer as nominal growth drops to 6.1% in Q2
In order for India to get to the $5 trillion mark, it needed to grow at 11-12% nominal rate for the next five-years

Just as India's GDP growth at constant prices fell to a 26-quarter low of 4.5 pc, India's nominal rate of GDP growth has slumped to 6.1 pc. At this rate, India's target of $5 trillion GDP will take 4 years longer than 2023-24-the original 5-year deadline.

In order for India to get to the $5 trillion mark, it needed to grow at 11-12% nominal rate for the next five-years.

The government has set a target to grow India's economy to $5 trillion dollar by 2023-24. But the nominal GDP growth or GDP growth measured at current price, in the second quarter of the current financial year has fallen to nearly half of what the government has budgeted for.

Also Read: GDP at 4.5%: What is recession?

In the first quarter, the nominal GDP growth was at 8%. The government has estimated the GDP at current price to grow at 12% for the full year, while the same is at 7% for the first half of the year. Now, for the nominal GDP growth to achieve the target of 12%, it has to grow at 17% for the second half-a near impossible feat.

This drop in nominal GDP growth rate is significant as it also upsets the government's fiscal estimates in the current financial year. Besides, the government's tax collection as well as corporate revenue growth is linked to the nominal growth rate.

"Such a low nominal growth will pose significant challenge for the economy. It does not augur well both for the government and the corporate sector as tax collection of the government and top line of the corporate sector is linked to nominal GDP," says Sunil Kumar Sinha, principal economist, India Ratings.

Also Read:GDP growth slips: Economy on red alert but govt in denial

A lower than targeted nominal GDP growth rate means the government would be unable to achieve the targeted GDP size of Rs 211 lakh crore at the end of current financial year. This then upsets fiscal estimates of the government.

For example, the government has estimated fiscal deficit of 3.3% assuming that the nominal GDP would grow at 12%. However, with a 12% full-year growth looking improbable, the fiscal deficit ratio would look worse.

"Fiscal deficit ratio would go up, both because denominator gets smaller and so does the numerator as tax collections come down," says Madan Sabnavis, chief economist, CARE Ratings.

Also Read:Q2 GDP: Fiscal deficit of 3.9% realistic, says Uday Kotak

Meanwhile, the monthly review of accounts of Union government till October shows that fiscal deficit in value term has already crossed the government's full-year target of Rs 7.04 lakh crore. In the April-October 2019 period, fiscal deficit was Rs 7.20 lakh crore, 102.4% of the target.

The net tax collections till October remain subdued at Rs 6.83 lakh crore, just 41.4% of the full-year Target of Rs 16.5 lakh crore.

Also Read:GDP means 'Godse Divisive Politics' to BJP: Congress

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