Page 113 - Abhivruddhi

Section One: Introduction
The projection of GDP targets: real and nominal, levels and growth
rates is a longstanding aspect of macroeconomic policy analysis. These
projections have multiple purposes: first, for the government to get an
estimate of taxable capacity, second, for private businesses to get an
estimate of the size and scope of the markets for their products; and third,
for economists and policy analysts to engage in growth comparisons,
both cross country and time series, that can be used as inputs into
macroeconomic and other policies.
Real GDP is obviously the variable of most concern -- both level and
growth rate, since employment, production and consumption in an
economy are most closely linked to it. However, what is important to note
is that for conducting fiscal policy, nominal GDP projections are needed
for two reasons:
(i) to estimate tax collections in the upcoming year and fix tax rates
accordingly to generate corresponding revenues to meet the fiscal targets
and
(ii) Assessment of debt sustainability based on the Domar debt
condition that nominal GDP growth exceed the (average) interest rate on
government debt. (Nominal GDP will henceforth be labelled as NGDP).
Specifically in India’s legal fiscal framework, nominal GDP projections
are needed in connection with the Fiscal Responsibility and Budget
Management Act of 2004 (FRBMA) and the Goods and Service Tax
framework (GST) regime that was introduced in 2017. The GST regime
which became law in 2017 requires transfers from Centre to States of
their share of taxes. The implied NGDP growth rate in GST projections
is very crucial to generating enough revenue to make the transfers as
constitutionally mandated.
More generally, whether for public or private entities, all spending and
revenues need to be done year by year, or intra year, in nominal terms,
based on actual cash flows. Projecting these cash flows can only be done
with nominal GDP values. Further in dollar terms at market exchange
rates, NGDP levels and growth rates are used by companies trying to
assess the market size in deciding where to locate their plant or invest
in research and development, and for production and volume decisions
based on demand and sales estimation. Firms also need to project the
breakdown of value of sales into volume (real GDP) and price (inflation)
components.
With this conceptual background pertaining to the need for various

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