InvestorQ : What is this nominal growth and what does that mean when it comes to GDP?
prachi Patwardhan made post

What is this nominal growth and what does that mean when it comes to GDP?

rhea Babu answered.
3 years ago

There has been a lot of discussion about the real GDP growth being at a 6 year low but what nobody is talking about is that the Nominal growth rate is at a 16 year low at just 7.99%. That growth was last seen in the year 2002-03 and has not been seen hence. Here is why nominal growth is important.

· The nominal growth is the GDP growth before inflation. India needs nominal growth of nearly 12% to be able to touch the $5 trillion GDP in the next 6 years. We don’t seem to be getting anywhere close to that.

· The economy grew at 7.99% in nominal terms, the slowest since the third quarter of 2002-03, taking into consideration the previous two series of national accounts. This is important because the Union Budget has assumed an 11% nominal growth rate.

· Nominal GDP growth is a proxy for growth in incomes, and the current slowdown signals a sharp fall in the latter. The fiscal balance of the Union and state governments could see trouble, too, because poor nominal growth affects tax collection in adverse manner. This is more so in case of indirect tax collections and the impact is already visible in GDP.

· Nominal GDP is more reflective of the actual corporate level sales growth and that is reflected in the lower nominal GDP numbers. Typically, high-frequency indicators such as sales of passenger and commercial vehicles, production of capital goods, consumer durables, steel and cement, use of air travel, among others, had shown weak growth, in the April-June period. The official growth estimate falls in line with this trend.

· Global and domestic headwinds in terms of macros tend to get better reflected nominal GDP numbers. The macro situation is almost similar to the 2013 situation when the growth had fallen below 5% in real terms. Nominal growth has a better correlation with the GFD or gross fixed capital formation which grew at just 4%. Government expenditure grew at a faster rate than the economy.

The Reserve Bank of India’s monetary policy committee revised real GDP growth down from 7% to 6.9%. Nomura has already revised it in line with the RBI but Moody’s expects India to grow still slower at 6.2% in FY20. For now, the Moody estimates look more achievable.