What is bringing in the kick to India’s GDP numbers?

A Friday morning tweet by Congress leader Jairam Ramesh, claiming that a whole percentage point overstates the headline numbers because of the price deflators used has again brought into focus how the scheme of computing growth numbers alone will help produce reliable numbers.  

Price deflators, also known as deflators or price indices, are used to adjust nominal economic data for the effects of inflation or deflation to obtain real, inflation-adjusted values. While they are a valuable tool for economic analysis, they can sometimes overstate headline numbers, which may not accurately reflect the actual economic situation.

M Govinda Rao, renowned economist and former director of the National Institute of Public Finance and Policy, said, “The growth rates of GDP (gross domestic product) and GVA (gross value added) hold significant importance as they are pivotal indicators of economic growth and play a substantial role in shaping economic development within a nation. Consequently, the approach used to calculate these figures becomes of utmost importance, as it directly impacts the reliability of the data.”  

The System of National Accounts (SNA) established in 2008 represents a universally accepted set of guidelines for compiling economic activity measurements. As per the United Nations Statistics Division, the SNA offers a comprehensive view of economic processes, detailing how production is distributed among consumers, businesses, government, and foreign entities.

It is designed to cater to the diverse requirements of countries at various stages of economic advancement. In line with the SNA (2008), India updated its methodology for computing various macroeconomic parameters within the National Accounts Statistics (NAS) during the fiscal year 2014-15.

Backing claims by Congress leader Ramesh, economic experts concur that price deflators can also provide a rosier picture by understating the true impact of inflation, which can cause headline numbers to be overstated.

“For example, if price deflators fail to adequately account for rising prices in certain essential goods and services, they might underestimate the actual cost of living. As a result, the inflation rate reported by the deflators could be lower than the real-world inflation experienced by people, making economic conditions appear better than they actually are and potentially overstating headline numbers like economic growth or real income,” a professor from Mumbai University said.  

For instance, experts cited health care and housing as sectors where price deflators may understate inflation, leading to potentially rosier headline numbers. “Price deflators used for measuring overall inflation may not fully capture the significant and often rapid increase in healthcare costs. Suppose the cost of medical services, prescription drugs, or health insurance premiums rises substantially, but the deflator does not adequately account for these increases. In that case, it can result in understating healthcare-related inflation,” experts said.

As a result, the overall inflation rate reported may be lower than the actual increase in healthcare expenses, making it seem like healthcare is becoming more affordable than it truly is.

Similarly, housing costs, including rent and housing prices, are a significant part of most people's expenses. However, how housing costs are included in inflation can sometimes lead to understated inflation. For instance, if rental prices determine housing costs, but people are increasingly purchasing homes instead of renting, the deflator might not fully capture the rise in home prices. As a result, housing costs could appear to rise more slowly than they are, leading to an understatement of overall inflation.

The latest GDP figures released by the government on Thursday said India recorded its highest point in four consecutive quarters, with an economic growth rate of 7.8 per cent in the April-June quarter of 2023-24. According to data unveiled by the National Statistical Office, this upswing can be predominantly attributed to increased activity in agriculture and various service sectors, notably financial, real estate, professional services, and contact-intensive industries such as trade, hospitality, and transportation. On the contrary, the manufacturing and construction sectors displayed growth rates that fell short of expectations.

However, experts critical of the government referred to several concerning economic trends emerging from the data. “Firstly, consumption growth, particularly in rural areas, is significantly lagging. Secondly, the growth in imports surpasses that of exports, indicating trade imbalances,” experts pointed out.  They also highlighted that "manufacturing growth has yet to pick up despite claims to the contrary."

Additionally, experts said manufacturing growth has yet to pick up despite claims to the contrary. Moreover, the effects of a monsoon deficit are expected to become increasingly evident in the second quarter. As things stand, the projected growth for 2022-23 is estimated to hover around 6 per cent. “However, even this modest growth rate is unlikely to translate into rising incomes for most Indians, given the increasing levels of inequality in the country,” Ramesh said.