Is the GDP number an underestimate?
2 min read 01 Sep 2022, 11:10 PM ISTA low base has made interpreting GDP data difficult. But another factor may have led to a distortion: the government’s deflation method. Mint explains:
PremiumThe Indian economy grew 13.5% in the June quarter, much lower than the central bank’s forecast of 16.2%. While a low base has made interpreting the data difficult, another factor may have led to a distortion: the government’s deflation method. Mint explains:
What does the latest GDP data tell us?
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Not much. The year-on-year GDP growth was 13.5% in the June-ended quarter, up from 4.1% the previous quarter. But thanks to a low base, the figure only gives an optical illusion of high growth. To this end, a comparison with pre-pandemic level (April-June 2019) reveals that GDP has managed to reach only 4% higher in the past three years. Moreover, the growth was much lower than RBI’s projection of 16.2%. While a low base has bumped up the numbers, another factor, which has more to do with the statistical methodology, may have led to the underestimation of the figures. It is the usage of ‘single deflation’.
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How does deflation come into the picture?
The statistics ministry first calculates economic output at “current prices", which are price levels that we see in everyday life. But some of this growth may be just because of inflation. So, the ministry also reports an adjusted “real" GDP by stripping off the impact of inflation to arrive at “GDP at constant prices". For example, the GDP at current prices in Q1 was ₹64.95 trillion, up 26.7% year-on-year. After adjusting for inflation, real GDP came out to be ₹36.85 trillion, a growth of 13.5%. The big difference was due to high inflation during the quarter: wholesale prices were up 15.7% and retail prices 7.3%.
How are current prices deflated?
There are two ways: single deflation and double deflation. Single deflation uses a common price deflator to adjust both input and output prices, while double deflation uses two different deflators for them. India uses a mix: double deflation for agri-culture, and mining and quarrying; and single deflation for other sectors. This is a unique method used in India.
So, was Q1 GDP an underestimate?
Most likely. That’s because the GDP deflator roughly reflects 70% of the Wholesale Price Index and 30% of the Consumer Price Index. The former measure of inflation was sharply higher during Q1. “With rising commodity prices, input prices grew much faster than output prices, leading to a likely underestimation of GVA growth," HSBC Global Research said. The limitation of single deflation is that it opens the door to over-estimation or underestimation when input and output prices are rising at vastly different paces.
What does the future look like?
With crude oil prices cooling, both WPI and CPI inflation have moderated. However, the gap between the two remains fairly large, even though it has come down from an average of 8.5 percentage points in April-June to 7.2 percentage points in July. This may again lead to an under-estimation in Q2, unless a plunge in WPI inflation closes the gap, since CPI inflation is not expected to rise further from the current level. Faster pass-through of input prices (WPI) to output prices (CPI may also limit underestimation.
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