One trend in the Indian economy that deserves far more attention right now is the sharp recovery in the nominal gross domestic product (GDP) over the past four quarters. This recovery is especially significant as the countdown to the new budget to be presented by finance minister Arun Jaitley begins.Most analysts are focussed on how rapidly the economy is growing in real terms—after stripping away the effects of price changes. What matters for economic welfare is the increase in output rather than the value of output. However, there is one important reason why economists sometimes need to look to nominal rather than real values. Nominal GDP matters when the government sits down for its annual budgeting exercise. The amount of tax that can be collected is based on the size of nominal rather than real output. The finance ministry usually works with an overall estimate of nominal GDP growth. It pays relatively less attention in its budget to whether nominal growth in the economy is dominated by high growth or high inflation. This could be a problem at a time when the Reserve Bank of India (RBI) has been formally asked to focus its monetary policy on meeting an inflation target. The question worth asking right now is whether Indian fiscal policy should explicitly take the monetary policy target into consideration when the budget is being finalized. The trajectory of nominal GDP growth in the medium term deserves to be watched—once the transient effects of the currency shock subside. The importance given to the inflation target when designing the budget is also an issue that should attract more attention.

(Live Mint)