Quick Take | Crude oil prices key to unravelling GDP back series puzzle

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Quick Take | Crude oil prices key to unravelling GDP back series puzzle

Quick Take | Crude oil prices key to unravelling GDP back series puzzle
2018-12-05 17:17:31

Manas Chakravarty

There has been a lot of politicking about the new GDP back series. There is also little doubt that there will continue to be disagreements among economists on whether the methodology for computing the back series is correct.

But what if we shift the focus of the debate? What if we assume the new back series is right and instead ask why growth has been higher during the last four years than in the previous nine years?

To do that, let’s look at a bit of elementary economic theory. GDP is computed by adding together consumption spending, government spending, capital formation and the contribution of the external sector or exports minus imports. Elementary economics textbooks write it thus: GDP=C+I+G+X-M, where C stands for consumption, I for investment, G for government spending, X for exports and M for imports. It’s amply clear from the above that if imports exceed exports then GDP is dragged down.

Chart 1

Manas Crude GDP Quick Take Chart 1Now let’s look at what the GDP back series says about the extent of drag on GDP from an excess of imports over exports. Chart 1, taken from the CSO’s back series data, shows that the external sector has always been negative for the Indian economy, reflected in the trade deficit. But the trade deficit from 2006-07 to 2012-13 was consistently higher than the deficit during the last four years.

Why did that happen? The answer lies in the price of crude oil.

Chart  2

Manas Crude GDP Quick Take Chart 2Chart 2 shows that the average price of Brent crude oil was much higher during the UPA era than in the last four years. And since crude oil imports are the biggest factor in the trade deficit, higher oil prices boosted the import bill, increased the trade deficit and lowered GDP.

Chart 3

Manas Crude GDP Quick Take Chart 3Cast your eyes on Chart 3, which shows crude imports as a percentage of nominal GDP. Note how oil imports as a percentage of GDP fell sharply in the last three years as oil prices fell.

The International Monetary Fund has calculated the windfall gains to importers from the fall in the price of crude and other commodities. It found that terms-of-trade windfall gains for India were a cumulative 4 percent of GDP in 2015 and 2016, while the rise in oil prices last year was estimated to have pared GDP growth by 1.48 percent. The fall in GDP growth during 2017-18 has been attributed to the disruption consequent upon the introduction of the Goods & Services Tax, but the IMF makes it clear that rising oil prices were also responsible. Similarly, the comparatively higher growth in 2015 and 2016 owes much to lower crude oil prices.

What of the future? Taking commodity prices in August 2018, the IMF has predicted that average drag on GDP from higher oil prices will be 0.64 percent this year and the next.

Images are for reference only.Images gathered automatic from google.All rights on the images are with their original owners.



Quick Take | Crude oil prices key to unravelling GDP back series puzzle
2018-12-05 17:17:31

Images are for reference only.Images gathered automatic from google.All rights on the images are with their original owners.

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