Home / Politics / Policy /  The three unanswered questions in GDP data

The latest economic growth numbers for the first quarter of the current fiscal year released on Monday have puzzled analysts who have yet again questioned the controversial methodology of calculating GDP adopted by the Central Statistics Office (CSO) earlier this year.

Data released by CSO on Monday showed that GDP at market prices decelerated to 7% in the June quarter from 7.5% in the March quarter, while another measure of economic growth, GVA (gross value added) at basic prices, showed that the economy quickened to 7.1% in June quarter from 6.1% in the preceding three months, thus sending conflicting signals.

GDP at market prices is estimated by adding net indirect taxes to GVA at basic prices. Net indirect taxes is computed by deducting subsidies from gross indirect taxes on products, including import duties.

Analysts see three closely inter-related problems.

Problem 1: Despite a 37.4% growth in indirect tax collections in the June quarter, GDP at market prices slowed to 7%.

Pronab Sen, chairman of the National Statistical Commission, on Monday pointed out that the huge growth in indirect taxes is reflected by 60,685 crore increase in indirect taxes in the June quarter as reflected by the difference between nominal GDP and nominal GVA numbers in the CSO data.

However, the same kind of growth momentum does not get translated into real GDP numbers. While net indirect taxes in nominal terms rose 39.9%, in real terms the increase was 6.5%.

Standarrd Chartered Bank in a research note said it expects this apparent inconsistency to correct in the next quarter. “If this does not occur, it will further add to the challenges in understanding the new GDP series," it added.

Sen acknowledged the divergence but blamed it on the new methodology formulated by the International Monetary Fund. The System of National Accounts, 2008, a statistical framework developed by IMF which was adopted by CSO in February, mandates that only the real growth in the underlying indirect tax base is included in calculating the GDP at market prices. “Increase in indirect tax collections due to an increase in (indirect) tax rates is reflected as a rate of change in price," Sen added.

“Suppose India imports 100 tonnes of goods and the import duty imposed on it is 10. If the import duty is increased to 20, though tax collection increases, it is due to higher taxes not because of increase in imports (base). The new methodology mandates that such rise in tax collection be considered a price effect and not be included in calculation of real GDP growth," he added.

The government had increased service tax to 14% in the February budget and increased excise duty three times between November and January. Sen said most of the nominal increase in indirect tax collection was due to this increase in tax rates by the government and not due to any widening of the base.

Problem 2: Inflation computed from the GDP deflator quickened to 1.7% in the April-June quarter, compared with a mere 0.2% in the January-March quarter at a time when both retail and wholesale price inflation slowed.

Yes Bank Ltd in a research note said the increase in the GDP deflator despite moderation in inflation metrics and the divergent trend in nominal and real net taxes on products leads to some unanswered questions. “One, net product taxes has recorded a tepid growth of 6.5% even as growth in indirect taxes (excise, customs, and service) was recorded at 37.6% in Q1FY16 compared to a de-growth of 0.4% during Q1FY15. Likewise, central subsidies in Q1FY16 de-grew by ~25% compared to a growth of 3.5% in Q1FY15," it added.

Sen said this is again because the increase in tax rate is treated as a price change. “That is why while the GDP deflator is at 1.7%, GVA deflator is virtually zero," he added.

Problem 3: GDP at market prices at 7% comes lower than GVA at basic prices at 7.1%.

Religare Capital in a research note said GDP growth being lower than GVA growth raises doubts on the methodology. “GDP growth, which includes net indirect taxes, at 7%, was below GVA. This raises questions over GDP estimation methodology because we know that indirect taxes had grown by 38% in the quarter unless subsidies decline more than compensated for the higher tax revenue," it added.

Sen said this is because the tax base has shrunk due to decline in imports even as overall indirect tax collections have increased.

Both value of imports (-5.4%) and exports (-6.5%) declined in the first quarter, though the fall was sharper in the latter because of weak foreign demand.

“Such a disconnect between GDP and GVA will remain till the fourth quarter (January-March) of the financial year after which the impact of the indirect tax rate hikes will peter out," Sen added.

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