But nearly instantly, it led to a contemporary controversy on two totally different counts.

First, on September 1st, Jairam Ramesh, common secretary of the Indian National Congress, the primary Opposition get together, alleged that the Q1 GDP knowledge was overstating the GDP by a full share level.

“After the headline quarterly GDP growth numbers came out last evening and after the usual round of drum-beating over them, here is the harsh reality… The headline numbers are overstated by a full percentage point because of the price deflators used…” he said on X (previously Twitter).

Second, some economists additionally pointed to the 2 predominant methods through which India calculates its GDP and argued that they didn’t match up. In different phrases, the allegation is that the federal government is favouring the upper estimate of GDP through the use of a statistical device known as “discrepancy”.

However, to grasp these two criticisms in addition to whether or not or not they’re well-founded, readers want to grasp the next issues about how GDP is calculated in India.

What is GDP and the way is it calculated?

The GDP is probably the most fundamental strategy to assess the efficiency of any financial system — each from one 12 months to a different in addition to throughout totally different nations. The concept behind the idea is to evaluate the dimensions of an financial system.

Ideally, the dimensions of the financial system ought to develop from one 12 months to a different. And that is what occurs most of the time. Barring years when some horrible disaster occurs — like in 2020 there was a worldwide pandemic — all economies are likely to develop from one 12 months to a different.

That’s as a result of technically GDP is outlined as the entire “market value” of all ultimate items and providers in an financial system. Thanks to the bit about “market value”, the GDP can develop both as a result of an financial system truly produces extra of products and providers or as a result of the identical degree of products and providers are priced increased, or — because it occurs nearly all the time — a mixture of the 2 elements.

Real GDP versus Nominal GDP

It is vital right here to tell apart between nominal GDP and actual GDP. The total GDP that one observes — by including up the market worth — is known as the nominal GDP. But to reach on the “real” GDP, statisticians take away the impact of worth inflation from nominal GDP.

Imagine for a second that the Indian financial system produces solely tractors, and that it produced 100 tractors in 2022, every valued at Rs 100. Then India’s GDP in 2022 might be Rs 10,000. Suppose additional that in 2023, India’s GDP is Rs 1,100.

In nominal phrases, India’s GDP has grown by 10%. But as a policymaker, one may be desirous about understanding what triggered the rise in GDP.

To make sure, it’s solely potential that each one the rise in GDP — Rs 100 — occurred as a result of the value of every tractor went up by 10%. In different phrases, inflation went up by 10%. In such a case, the expansion of “real” GDP — the rise within the precise variety of tractors — is zero per cent.

There is one other approach through which the GDP may have grown by Rs 100 — that’s if India made 101 tractors in 2023, whereas all of them continued to be priced at Rs 100. In this case each the nominal GDP progress fee in addition to the true GDP progress fee could be 10% whereas inflation could be zero per cent.

So actual GDP progress fee is arrived at by taking the nominal GDP progress fee and stripping it off the impact of inflation. This is finished through the use of what is known as a GDP or worth deflator — the time period that Jairam Ramesh used within the quote above.

Now right here is the essential factor: The GDP deflator shouldn’t be the identical quantity because the retail inflation or the wholesale inflation fee; moderately it’s a mixture of the 2.

Since the true GDP progress fee — which is the expansion fee one often talks about — is a derived quantity, it crucially relies on the speed of GDP deflator that the official statisticians assume to be the speed of inflation within the nation.

Two methods to calculate GDP

Beyond actual and nominal GDP, there may be an extra complication. This pertains to how one calculates the GDP per se.

To arrive on the measurement of the financial system, ought to one have a look at all the cash earned by everybody within the nation or ought to one have a look at all the cash spent by everybody within the nation?

The former technique is the earnings technique and the latter technique is known as the expenditure technique of calculating the GDP. As it seems, India calculates the GDP via each the strategies.

On paper, GDP needs to be the identical regardless of which technique one makes use of. Indeed, how can it’s totally different? But in actuality many points crop up.

For occasion, well timed knowledge availability. Official statisticians can’t all the time know precisely how a lot cash was spent or earned — not less than not inside the timeframe of 1 / 4 or a 12 months. That is why nationwide earnings knowledge usually will get revised.

As such, it’s not laborious to think about that the 2 estimates of GDP aren’t all the time equal — particularly not when quarterly knowledge comes out. The distinction between the 2 GDP estimates is known as “discrepancy” — it’s like that “miscellaneous” heading below which one places small expenditures that one can’t instantly recall or confirm.

So, are the allegations right?

Let’s sort out them one after the other.

Is India overstating its actual GDP progress fee?

As defined, India’s actual GDP is a derived quantity and relies upon solely on what statisticians assume to be the GDP deflator (the proxy fee of inflation throughout a interval).

What is thought for positive is that India’s nominal GDP in Q1 of FY24 was 8%. On the face of it, an actual GDP progress fee of seven.8% implies that inflation was simply 0.2% within the three months — April, May and June.

CHART 1 exhibits how uncommon that is. It maps each nominal GDP progress fee (in orange color) and GDP deflator (in blue) for every quarter (going again all the way in which to Q3 of 2008.

CHART 1 maps each nominal GDP progress fee (in orange color) and GDP deflator (in blue) for every quarter (going again all the way in which to Q3 of 2008.

As customers, most Indians would possibly discover a actual GDP progress fee of seven.8% an apparent overstatement. That’s as a result of the retail inflation fee (the inflation customers face) in these three months was 4.7%, 4.3% and 4.9%, respectively.

If one was to “deflate” nominal GDP utilizing shopper worth inflation, the true GDP would fall to lower than 4%.

But then if one goes by wholesale inflation, the true GDP will truly be a lot increased than 8%. That’s as a result of wholesale inflation was damaging in all of the three months — -0.8%, -3.6%, and -4.2%, respectively.

So the place does the reality lie?

The truth is that whereas both of those — retail or wholesale inflation charges — throw up a stark image, the efficient inflation fee is someplace in between. Even so, consultants had warned about the opportunity of actual GDP progress in Q1 showing too rosy lengthy earlier than both the info got here out or the Congress made allegations.

In a analysis word launched on August 4 — nearly a month earlier than the official knowledge was launched — HSBC’s Pranjul Bhandari [Chief India and Indonesia Economist, Managing Director, Global Research] had alerted that one thing like this will likely occur.

“The 1Q (April-June) GDP growth data is likely to come in at an impressive 8%. Though some of this exuberance is justified, led by improved terms of trade as commodity prices fell, some of it could simply be statistical. We estimate that issues with the manufacturing and services deflator could overstate GDP growth by 1 ppt (percentage point). And a low base could overstate it further,” said the word.

In occasions of such statistical abnormality, consultants advise that one should buttress one’s understanding of the financial system by taking a look at different obtainable variables.

“In such a scenario, looking at a host of other activity data may do a better job in gauging the actual growth-on-the-ground,” said Bhandari within the early August word.

However, this entire controversy is neither with out purpose nor and not using a lesson.

The truth is that India’s inflation indices must be up to date. In specific, consultants have been repeatedly arguing that the WPI — the wholesale price index — have to be discarded altogether in favour of a brand new Producer Price Index.

Why India must rethink using WPI inflation

In an in depth dialog, N R Bhanumurthy, VC of Dr B R Ambedkar School of Economics, defined why India must rethink WPI.

1> Normally WPI and CPI, that are consultant of worth pressures in wholesale market and retail markets respectively, are anticipated to be co-integrated and the causality ought to run from WPI to CPI. In a way that modifications in wholesale market costs ought to transmit to retail markets with a lag (as per our estimates in early 2000s, it was one month lag). However, within the latest interval such co-integration/causality is damaged, thus suggesting that one of many indices shouldn’t be reflecting the true worth and each aren’t transferring collectively.

2> In phrases of protection, WPI is essentially the costs in a section of the financial system because it doesn’t embody providers. On the opposite hand, providers are coated in CPI. As we now know the share of providers within the consumption basket is giant and rising, any worth index that excludes the providers might not be consultant worth financial system large.

3> Presently WPI is collected and processed by the Department of Commerce and Industry and largely follows the IIP (Index of Industrial Production) body, which itself is topic to criticism.

4> Moreover, WPI doesn’t present info on rural and concrete in addition to the state degree estimates, that are all related for public coverage.

What in regards to the problem of “discrepancy”? Do they overstate the GDP?

Under regular circumstances, one would assume that there might be some distinction between the GDP estimated utilizing earnings and expenditure strategies.

However, if this distinction is giant, that will mirror poorly on the standard of knowledge and the estimation methodology.

Again, one would count on that the discrepancy degree (as a share of the entire GDP) could be increased in quarterly GDP estimates and decrease in annual GDP estimates as a result of with time, extra dependable knowledge is accessible and estimates will be anticipated to return shut to one another.

Some economists corresponding to Ashoka Mody (Visiting Professor of International Economic Policy at Princeton University) who wrote in regards to the “discrepancy” problem in a latest Project Syndicate piece, have raised a query mark on the affect of “discrepancy” in estimating GDP.

“Typically, this discrepancy does not matter for calculating growth rates, because income and expenditure, even if they differ somewhat, have similar trends. But every now and then, the two series follow very different paths, with hugely consequential implications for evaluating economic performance. The Indian National Statistical Office’s latest report is a case in point. It shows that while income from production increased at an annual 7.8% rate in April-June, expenditure rose by only 1.4%. Both measures clearly have many errors. The NSO nonetheless treats income as the right one and assumes (as implied by its “discrepancy” word) that expenditure have to be equivalent to earnings earned. This is an apparent violation of worldwide finest observe. The whole level of the discrepancy line is to acknowledge statistical imperfections, to not make them disappear. The NSO is protecting up the fact of anemic expenditure at a time when many Indians are hurting, and when foreigners are exhibiting solely a restricted urge for food for Indian items,” he wrote in a chunk revealed on September 6.

This is from the official knowledge launch and it exhibits how the 2 GDP estimates (highlighted in crimson) are arrived at and what the extent of discrepancies (highlighted in inexperienced) is.

Since “real” GDP knowledge itself is below query, let’s have a look at the nominal GDP knowledge and the dimensions of discrepancy. The SCREENSHOT alongside if from the official knowledge launch and it exhibits how the 2 GDP estimates (highlighted in crimson) are arrived at and what the extent of discrepancies (highlighted in inexperienced) is.

As will be seen, the GDP from the earnings aspect — calculated by including Gross Value Added and Net Indirect Taxes — was Rs 7,066,534 whereas the GDP from the expenditure aspect (with out including discrepancies) was Rs 6,954,807.

In different phrases, it’s true that complete expenditures have been lower than complete earnings. The hole — Rs 111,726 — was added to the latter estimate below the heading of “discrepancies”.

But absolute values don’t inform something as a result of with every passing 12 months GDP and discrepancy will preserve going up in absolute phrases. What issues is the share of discrepancies in complete GDP and whether or not this share has gone up considerably. What additionally issues is whether or not there’s a pattern in discrepancies.

CHART 2 brings out is that discrepancy degree for Q1 shouldn’t be an outlier.

CHART 2 maps this by taking quarterly knowledge that goes again all the way in which to Q1 of 2011.

What the chart brings out is that discrepancy degree for Q1 shouldn’t be an outlier. In truth, the affect of discrepancy in explaining quarterly GDP has fluctuated a good bit prior to now as properly although broadly talking it has stayed inside 2%-3% of the entire quarterly GDP.

However, when one appears to be like on the share of discrepancies in annual GDP knowledge (SEE CHART 3), two issues stand out:

One, the fluctuations from one 12 months to a different are smaller than the fluctuations from one quarter to a different. This is comprehensible as a result of higher high quality knowledge is accessible over the entire 12 months.

CHART 3

Two, there’s a distinct pattern. Before 2012-13, GDP from the earnings technique was decrease than the GDP from expenditure technique — that’s why the discrepancy part was damaging. After 2012-13, GDP from expenditure technique is decrease and that’s the reason the discrepancy part is optimistic.

Upshot

This shouldn’t be the primary time that consultants have raised a query mark on the credibility on India’s GDP estimates. Here’s detailed explainer from 2019 when former Chief Economic Advisor (below the present authorities itself) had argued that India was overstating its GDP.

The vital factor to grasp is that the credibility of India’s GDP estimates relies on the standard of underlying knowledge be it the WPI inflation or shopper expenditure or Index of Industrial Production (IIP). Over the previous decade many of those databases haven’t obtained the eye they deserved. If policymakers don’t deal with the standard of Indian macroeconomic knowledge, the credibility of India’s GDP estimates will proceed to be questioned repeatedly.

Share you views and queries on udit.misra@expressindia.com

Until subsequent time,

Udit