New Delhi: IMF projections that the Indian economy will expand by 9.4% in 2010 should not surprise anyone as the Fund uses different methodology of calculating growth, says a key official with the multi-lateral lending agency.
While most other projections are based on gross domestic product at factor cost, IMF estimates economic growth on the basis of GDP at market price, IMF executive director Arvind Virmani said.
Whereas GDP based on market price takes into account taxes while calculating value of goods and services in the economy, the factor cost does not.
“Growth rates in GDP at market price and factor cost adjust themselves in a year or two,” explained Virmani, who went to IMF last year after serving as India’s chief economic advisor.
“For the last two years, GDP growth rates at market price were lower than at factor cost. So, this year it tends to be higher than factor cost,” he added.
Raising of Indian growth projections to 9.4% in 2010 by IMF, from its earlier estimate of 8.8%, surprised many people because the economy is yet to fully recover from the impact of financial crisis and return to high growth path.
Besides, as the Indian economy (based on the conventional factor cost) grew by 8.6% in the first quarter of 2010, the IMF prediction meant that it would have to expand much beyond 9.4% through the rest of the year.
The finance ministry expects the economy to grow by 8.5% this fiscal, which did not compare that well with the IMF projections of 9.4% for this calendar year.
At the outset, IMF estimates seemed surprising also because the Fund is believed to be too conservative and has been generally pegging India’s economic growth at less than the official predictions.
In fact, Finance Minister Pranab Mukherjee seemed to be too pleased with even IMF’s earlier projections 8.8% growth this calendar year.
“This year, my ministry has predicted a growth rate of 8.5%. I notice that the IMF has challenged our prediction. For once, however, I am not going to contest the IMF assessment. The IMF believes that the Indian economy will grow at 8.8%,” Mukherjee had said at the US-India CEO Forum in Washington.
Based on the conventional method, Indian economy grew by 6.7% during 2008-09, while estimated on the basis of market prices, it expanded by just 5.1%.
The advance estimates of 2009-10 pegged economic growth at 7.2% based on factor cost, but 6.8% based on market prices.
However, actual data revealed that Indian economy grew by 7.4% last fiscal based on factor cost, and 7.7% on market prices.