Ensuring the Credibility of India’s GDP Estimates

India recorded a real GDP (gross domestic product) growth of 7.8 per cent and 7.6 per cent in the first two quarters of FY24 — the highest among G20 countries, suggesting a continuation of the strong economic recovery witnessed in the past few quarters. Yet, as India aims for global economic prominence, the accuracy of its economic indicators is garnering concern. Two pressing issues have reignited the debate about the credibility of India’s GDP growth rate. First, a high value of discrepancy in the expenditure side of GDP estimation in the last two quarters of FY24.The second concern is regarding a very small difference in the nominal and real GDP growth, which is noteworthy given the high consumer inflation.It is important to mention that these issues arise due to the matching of GDP estimates from the production side to the expenditure side of the economy and do not necessarily cast doubt on the estimates obtained from the production side of the economy. We dig into the reasons for these recurring concerns and suggest desirable changes to ensure the credibility of GDP estimates. India’s Debt Numbers at the Union and State Level Indicate a Brewing CrisisThere are three equivalent approaches to measuring GDP: production, expenditure, and income. Here, we focus on the first two. On the production side, gross value added (GVA) is aggregated across sectors. Nominal GDP numbers are obtained by adding net indirect taxes to this. On the expenditure side, GDP is obtained by calculating expenditure made by various entities (government, private, net exports) in the economy, including investment and changes in inventory. These nominal figures are then adjusted with representative price indices to obtain real GDP. In India, the estimation from the production side is known to be more robust. This is because the expenditure items are obtained using measured and proxied components. Discrepancies arise when production-side estimates are matched to the expenditure side. The discrepancies are nothing but shortfall (or surplus) in the calculation of GDP using the expenditure method relative to the production methods. Ideally, this discrepancy should be unpredictable given its nature.However, there is a pattern in the discrepancies, particularly with the inflation gap i.e., the gap between wholesale and consumer inflation. The inflation gap, in a way, is the gap between producer and consumer inflation. Discrepancies as a share of GDP are usually lower (negative) during periods of high inflation gap and vice versa. Although wholesale and consumer price inflation broadly follow similar trends, the movements in wholesale inflation are known to be volatile with more pronounced movements.Thereby, the inflation gap is primarily driven by fluctuations in wholesale inflation. When the inflation gap widens due to higher wholesale inflation, the production side of the economy is deflated at a relatively higher rate leading to a lower real GDP from the production side and vice versa. We need high negative (positive) discrepancies to match the consumption side of the economy with the production side of the economy during periods of high (low) inflation gap. During FY22 and FY23 (figure 1a) wholesale inflation was very high (leading to a high inflation gap) and the discrepancies were large and negative. However, as the wholesale inflation declined due to declining global commodity prices, in Q1 and Q2 of FY24 the discrepancies became high and positive. In the past as well when the wholesale inflation turned negative during the commodity price crash of 2014-16, discrepancies turned positive and similar arguments about inaccuracies in GDP estimates were made.India’s 16th Finance Commission Set Up: Time To Review Its Role and Relevance?The second point of contention surrounding the GDP growth estimation revolves around the varying gap between nominal and real growth (growth gap). Interestingly, periods with a high inflation gap are also associated with a high growth gap (figure 1b). As argued above, a high inflation gap, driven by higher wholesale inflation, tends to raise the value of the deflator and hence high (low) inflation gap periods are associated with a high (low) gap between nominal and real GDP.Low inflation gap periods are associated with higher discrepancies and a lower deflator leading to a lower growth gap. This in effect gives rise to a negative correlation between discrepancies and growth gap (figure 1c). The simultaneous occurrence of higher discrepancies and lower growth gap raises questions about the truthfulness of GDP estimates.Reliable economic data is paramount for informed policymaking and effective economic planning. Recurrent scrutiny of GDP estimates is arising due to high discrepancies driven by a low inflation gap. This affects the credibility of the estimates and is bound to occur in future as well if we do not address underlying issues. While some level of discrepancy is natural in the estimation process, major economies such as the U.S. have maintained a discrepancy of less than 0.5 per cent of GDP over the last decade. The consistently high (more than 2 per cent of GDP) and predictable nature of discrepancies in India suggests that the expenditure side of the economy is not being captured as accurately as it should be. This entails not only an improvement in the expenditure estimation by timely consumer expenditure surveys but also the meticulous categorisation of expenditures and corresponding prices in consumer price indices that will give a more accurate deflator for the expenditure side of GDP. [Abhishek Kumar is a Non-Resident Associate Fellow and Divya Srinivasan is a Research Associate at the Centre for Social and Economic Progress (CSEP). The views expressed are the writers' own and not those of CSEP. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.]Why Has India's Population Zoomed Past China's? Blame Slow GDP Growth

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Ensuring the Credibility of India’s GDP Estimates

Two pressing issues have reignited the debate about the credibility of India’s GDP growth rate.

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