Editorial 2: Understanding the high April-June GDP growth numbers
Context:
Ministry of Statistics and Program Implementation (MoSPI) has released GDP estimates for April-June quarter. GDP has grown at the rate of 7.8% in the given quarter, higher than 7.4% in January-March period. These statistics call for close investigation as the GDP deflator used by it are not well defined. It uses faulty single deflation technique for all sectors except agriculture.
The GDP deflation:
- GDP growth is driven by two factors- Inflation and the volume of the production of goods and services.
- The GDP at nominal rate is calculated first. It captures the value of final goods and services produced by the economic factors within the domestic territory of any country in a given financial year at the current prices.
- This GDP is adjusted for inflation by using GDP deflator to give the GDP at real prices. These real prices are based on the base year adopted by the country for calculating its GDP. This real GDP is useful for comparison across the year and with the countries.
- Real GDP growth rate for April-June quarter is 7.8%, while the nominal GDP growth rate is 8.8%.
- The nominal GDP is Rs.86.05 lakh crore for April-June quarter. This GDP is deflated by using a combination of wholesale and retail inflation. Wholesale inflation has a significantly greater role in deflation.
- In April-June quarter, Wholesale Price Index (WPI) averaged less than 0.3%, while CPI inflation averaged 2.7% which is lowest in six years. This resulted in lower “GDP deflator” at 0.9%.
- The smaller the GDP Deflator, the lower the difference between nominal and real GDP.
Problems with GDP deflator:
- There are shortcomings in the method used by MoSPI for deflating the GDP. Most of the expected jump in real GDP id due to the sectors where very soft deflator leads to significant buoyancy in real growth numbers.
- In fact, nominal growth rates capture the growth trajectory more realistically.
- Services sector recorded the real growth at 9.3% in this period. The nominal growth is 11.3%, which is near to the growth of 11.2% recorded in October-December, 2024. The deflator is roughly 1.9%. Economists suggest that this real growth for services is overestimated.
- The deflator used for services aligns more with Goods oriented WPI inflation, than with CPI services inflation. As the WPI inflation for goods was low due to low commodity prices. This resulted in inadequately deflating services and exaggerating real growth.
Single and Double method of deflation:
- In ‘agriculture’ and ‘mining and quarrying sector’, different deflators are used for input and output. This is called double-deflation method.
- For other sectors, same deflator is used for input and output. This is called single deflation method.
- Double-deflation method is more useful in GDP calculation. If it would have been applied appropriately to manufacturing sector, then growth rate would have been much lower than 7.7% recorded in April-June.
Way Forward:
With WPI and CPI inflation expected to be low in July, this distortion in real GDP rates is expected to continue. The GDP deflator will remain low resulting in disconnect between real GDP and high frequency data such as IIP index, CPI index, PMI index. GDP is used as metric for FDI, and well-being at the global levels. These distortions lower the GDP data credibility and may impact ease of doing business in India.