Decline of base effects could be the cause of the slowing Indian Economy: World Bank report

Even though it will be slower than the 7.2 percent recorded in the previous fiscal year, growth is predicted to remain high at 6.3 percent.

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Analysts credit the Narendra Modi administration's initiatives for the robust growth. According to the World Bank's most recent assessment, the Indian economy's growth in the current fiscal may be weaker than expected, at 6.3 percent. India's economy will continue to grow at one of the quickest rates in the world, according to the report.

Weakening base effects are the cause of the expected economic slowdown.

What is base effect?

The base effect is the impact that selecting an alternative reference point when comparing two data points might have on the comparison's outcome.

When two data points are compared in a ratio and the current data point or point of interest is divided by or stated as a percentage of the base data point or point of comparison, the base effect takes place.

Since the base number serves as the comparison's denominator, comparisons made with different base values can have wildly dissimilar outcomes. A base with an extremely high or low value might significantly skew the ratio and produce a potentially misleading comparison.

Even a slight increase in the price index will result in a high rate of inflation in the current year if the inflation rate was low in the equivalent period of the previous year.

For Example:

Suppose the cost of a kilograms of tomatoes is

100 rupees in 2021; 110 in 2022; and 120 in 2023

As a result, we can see that the cost of a kilograms of tomatoes is rising by Rs. 10 years. However, the increase in inflation over the prior year as a percentage is 9.09%

Therefore, even when the rate of price growth has remained constant, the choice of base year may make inflation appear to be excessively high or low.

This means that a country that grew rapidly the previous year now faces a more difficult struggle to expand further. The overall global growth environment and domestic inflationary pressures, where prices are falling but remain excessive on average; also have an impact in this slow growth.

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