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Context: Experts have raised concerns about the recently released GDP data from the National Statistical Office (NSO).
More on the News
- Overstating GDP: The concern is that the Q1 GDP data released by the NSO was overstating the GDP growth rate by a full percentage point. Critics have claimed that this overstatement was due to the use of specific price deflators in the GDP calculation.
- Use of “Discrepancy” in GDP Calculation: Some experts raised concerns about the two primary methods used to calculate India’s GDP: the income method and the expenditure method. They argued that these methods did not consistently produce the same results, and there were suspicions that the government favored the higher estimate of GDP by using a statistical tool called “discrepancy.”
Background Information to Understand the Article
- GDP Definition: GDP (Gross Domestic Product) is a fundamental measure of an economy’s performance, assessing its size and growth. It represents the total market value of all final goods and services produced within an economy.
- Real GDP vs. Nominal GDP: Real GDP is adjusted for inflation, while nominal GDP is not. Real GDP measures actual changes in the quantity of goods and services produced, while nominal GDP reflects changes in both quantity and price.
- GDP Deflator: Real GDP is calculated by removing the effects of price inflation from nominal GDP using a GDP deflator, which is a combination of retail and wholesale inflation rates. It represents the ratio of nominal GDP to real GDP.
- Two Ways to Calculate GDP: India calculates GDP using both the income method (looking at all the money earned by everyone) and the expenditure method (looking at all the money spent by everyone). In theory, the results should be the same, but in practice, there can be differences due to data availability and reliability.
Is India overstating its real GDP growth rate?
- India’s nominal GDP in Q1 of FY24 was 8%. On the face of it, a real GDP growth rate of 7.8% implies that inflation was just 0.2% in the three months — April, May and June.
- From the perspective of a consumer, a real GDP growth rate of 7.8% may appear clearly overstated, primarily due to the fact that during these three months, retail inflation rates stood at 4.7%, 4.3%, and 4.9% respectively.
- If one were to adjust nominal GDP for consumer price inflation, the resulting real GDP figure would be less than 4%.
- Conversely, if we consider wholesale inflation, the real GDP could actually be significantly higher than the reported 8%, given that wholesale inflation was consistently negative during these three months, registering at -0.8%, -3.6%, and -4.2% respectively.
- In summary, the truth regarding India’s GDP growth rate likely lies somewhere between the contrasting figures indicated by retail and wholesale inflation rates.
- However, the controversy highlights the need for updates to India’s inflation indices, with arguments for replacing the Wholesale Price Index (WPI) with a more relevant Producer Price Index to enhance data accuracy.
Why India needs to rethink the use of WPI inflation?
- Lack of Integration: This means that changes in wholesale market prices are not transmitting to retail markets as they used to, and one of the indices is not reflecting the real price.
- WPI does not cover services, which are a large and growing share of the economy. This makes it a less representative measure of price inflation in the economy as a whole.
- WPI data is collected and processed by the Department of Commerce and Industry, largely following the Index of Industrial Production (IIP) frame. The IIP itself has faced criticism, raising concerns about the quality and accuracy of WPI data.
- WPI does not offer information on rural and urban price variations or state-level estimates, which are vital for effective public policy formulation and decision-making.
What about the issue of “discrepancy”? Do they overstate the GDP?
- The discrepancy is the difference between GDP estimated using the income method and GDP estimated using the expenditure method.
- Under normal circumstances, there will be some difference between the GDP estimated using income and expenditure methods.
- However, if this difference is large, that would reflect poorly on the quality of data and the estimation methodology.
- Also, the discrepancy level (as a percentage of the total GDP) would be higher in quarterly GDP estimates and lower in annual GDP estimates because with time, more reliable data is available and estimates can be expected to come close to each other.
Conclusion: The credibility of India’s GDP estimates depends on the quality of underlying data, such as the WPI inflation, consumer expenditure, and Index of Industrial Production (IIP). Over the past decade, many of these databases have not received the attention they deserved. The government needs to take steps to improve the quality of macroeconomic data in order to ensure that India’s GDP estimates are credible.