Get the macro numbers right

Get the macro numbers right

The Central Statistics Office’s estimates of the gross domestic product (GDP) for the June quarter were widely criticized as soon as they were released, since GDP growth measured by the supply-side data and by the demand-side showed a huge divergence.

GDP is measured on the supply side by adding up the cost paid to the factors of production and is called GDP at factor cost. GDP on the demand side adds up final expenditures on consumption, capital formation and the like and is computed at market prices. Since GDP at market prices includes net indirect taxes, there will be some difference between the two measures, but CSO’s estimates, at constant 2004-05 prices, put GDP growth at factor cost at 8.8%, while GDP growth at market prices was 3.7%. A difference of this magnitude was just not possible, and a chorus of voices said so. Thankfully, CSO has now come out with revised numbers, which put GDP growth at market prices (at constant 2004-05 prices) at 10%, while leaving the earlier estimate at factor cost unchanged. Since there has been no change in GDP at current prices, the problem appears to have been the GDP deflator, which is a measure of inflation and the mechanism through which GDP at current prices is converted to GDP at constant prices.

It’s good that CSO has promptly corrected the mistake after it was pointed out. But even so, it’s very surprising that there exist no checks in the system that would spot such a glaring difference between the two sets of GDP estimates. Clearly, CSO immediately needs to put these checks in place. Moreover, while the revised data puts GDP growth at market prices at 10%, as much as 45% of that is on account of the growth in an item called “discrepancies". This only goes to show the unreliability of this data.

But CSO’s blunder will have served a purpose if it draws attention to the urgent need to revamp our statistical system. The inadequacies can be classified into three main areas. The first of these is the need to update the base year for the Wholesale Price Index and the Index of Industrial Production and excluding outdated items and incorporating new ones. The work to have 2004-05 as the base year is on, but needs to be expedited. The second area is in widening the data series. For instance, it’s a shame that we still do not have data on employment, or on housing starts. And finally, the lag in publishing the data needs to be reduced. Given these shortcomings, it’s no surprise that the macro numbers have scarcely any impact on the markets.

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