India's GDP Growth Discrepancies: Here's What Economists Say
Single or double deflation, nominal or real growth, expenditure or the production approach, here's what matters.
How is the economy doing? Is that reflected in official data? How reliable is the data?
Concerns over old and outdated data sets, a delayed census, quality concerns, and allegations of government interference have cropped up with increasing frequency in recent years. This time, post the release of the April-June 2023 GDP release, former Chief Economic Advisor Arvind Subramanian has raised questions around nominal growth, throwing up a different picture.
The gross domestic product grew 7.8% in April-June, a step up from 6.1% in January-March and the highest in four quarters, according to the latest estimates released by the government's statistical office in August. Nominal figures tracked the real numbers until the first half of FY23 but then declined by 14 percentage points over the past three quarters, Subramanian said in a column co-authored with Josh Felman.
The problem with focusing on real growth is that the Central Statistical Office uses single deflation (deflating the nominal value added in each sector by various price indices) rather than the international standard of double deflation (deflating output by output prices and inputs by input prices), the authors said.
A deflator is an adjustment made to current prices so that they can be compared with with past data.
The second issue, according to Subramanian and Felman, is that a number of sectors of the economy are deflated by inappropriate indices.
Single Or Double Deflation
In rebuttal, the finance ministry said that the wholesale price index dominates India's GDP deflator. It peaked in the first quarter of 2022–23 due to oil and food price increases in the wake of the war in Ukraine and supply-side disruptions. Prices began to come down from August 2023 onward. Hence, WPI is now contracting year-on-year. It will soon pass once the statistical base effect disappears, the ministry said.
As an internationally recognised practice, India, too, can use the double-deflation method in order to iron out any differences that emerge due to the usage of single deflation, said Jahnavi Prabhakar, senior economist at the Bank of Baroda. It will also come in handy in tracking the international prices correctly, especially those of commodities, she said.
Deflator issues for the manufacturing and services sectors are likely to have overstated the April–June 2023 quarter's growth print, said Pranjul Bhandari, chief economist at HSBC, in a note published after the GDP release. The practice of single deflation instead of double deflation at a time when commodity prices have fallen is likely to have overstated manufacturing growth by 2.5 percentage points and GDP growth by 0.33 percentage points, she wrote.
The use of a services deflator, which has a disproportionately high share of goods in it, is likely to have exaggerated services growth by 1.2 percentage points and overall growth by 0.67 percentage points, she said. The two deflator issues, together, are likely to have overestimated headline GDP growth by one percentage point, she said.
However, according to Radhika Pandey, associate professor at the National Institute of Public Finance and Policy, double deflation might not necessarily improve the reliability of estimates. While it is already used for agriculture, it might not be possible to use it in all sectors, she said.
Nominal Growth Vs Real Growth
Real or nominal estimates cannot be used interchangeably, Pandey said. Nominal estimates include a price effect, she explained. They will show subdued growth at a time when commodity prices are off their peak.
It would be an error to look at nominal figures alone because WPI inflation had turned negative in Q1 FY24, Gaura Sen Gupta, India economist at IDFC First Bank, said. "If we look purely in nominal terms, it would imply that production has slowed because inflation has slowed," she explained. The workaround, she said, would be to look at other high-frequency growth indicators and see what trend they are indicating.
Production And Expenditure Approach
GDP is measured from the production side, while expenditure figures are instead derived from a mix of measured components and components that are proxied and/or residually allocated, Subramanian and Felman said. As a result, discrepancies arise. The finance ministry, too, said that discrepancies are both positive and negative. Over time, they wash out.
The discrepancies lead to overestimation of growth numbers through one method, said Prabhakar. However, such discrepancies have been seen in the past too. This is expected to narrow down in the coming quarters and should not be a challenge, she said. The focus should be more on the underlying growth parameters that need to be tracked on a regular basism she said.
In any case, Pandey said, annually the discrepancy component is less than 2% of GDP, so it will not make much of a difference.