Don’t compare apples to oranges: how Govt is defending Q3 GDP data

This means India’s GDP is estimated to grow at 5.1% in Q4, significantly higher than the 4.2% projected by the Reserve Bank of India (RBI) in its December policy review.

Chief Economic Adviser (CEA) V Anantha Nageswaran said on Wednesday that there is “much misunderstanding” of the Q3 GDP data, given that it came with revisions in data for previous years.

What is the government saying on the GDP data?

The CEA said the Q3 data have to be seen in the backdrop of revisions for previous financial years. For Private Final Consumption Expenditure (PFCE), which reflects consumption demand, he said the “data revision to the prior year(s) has made a 6 per cent growth rate come down to 2 per cent in Q3FY23”.

“Even though one is comparing consumption to consumption, one is comparing the cumulative base effect of the first revision to 2021-22, the second revision to 2020-21, and the third revision to 2019-20, all of which now inflate the base period data and depress the growth rate for 2022-23,” the CEA said.

This, he said, was an “apples to oranges” comparison. “When one set of data is revised to take into account underlying data revisions, larger samples, etc., and the other is not, it is not a like-for-like comparison.”

Similarly, manufacturing GVA would have grown by 5.1 per cent in FY23 based on the second advance estimate without revised data, Nageswaran said. “However, it will grow by 0.6 per cent YoY in this period after revision. That is a revision of 4.5 percentage points,” he said.

For Q3, manufacturing would have grown by 3.8% without revised data. However, it has contracted by 1.1% YoY in Q3 FY23 after this revision, Nageswaran said.

“The argument that the recovery has become shallower does not make sense since one is not making a fair comparison,” he said.

What were the revisions in the GDP data released on Tuesday?

Along with the Q3 data, revised data for previous financial years were also released on Tuesday. The growth rate for FY2021-22 was revised upward by 40 basis points to 9.1% from 8.7% earlier. There was upward revision for the Covid period too — GDP for FY2020-21 is now estimated at (-) 5.8% instead of (-) 6.6%. For 2019-20, the growth rate was revised upward to 3.9% from 3.7%.

In the current financial year, GDP growth rate for Q1 (April-June) was revised downward from 13.5% to 13.2%; the Q2 (July-September) number remained unchanged at 6.3%.

With the revisions undertaken for the previous fiscal, the GDP components for FY23 also underwent revision: Government Final Consumption Expenditure (GFCE) has been revised down to 1.2% from 3.1% and PFCE is now estimated at 7.3% from 7.7% earlier, while gross fixed capital formation (GFCF) — an indicator of investment — is seen growing at 11.2% against the 11.5% estimated earlier.

What are first and second advance GDP estimates?

GDP advance estimates were earlier released in February-end; in 2016-17, the NSO introduced the first advance estimates.

The First Advance Estimates (FAE), released on January 7, mark the first official government estimate for economic growth ahead of the Union Budget for the next fiscal. The First Advance Estimates are obtained by extrapolating 7-8 months’ data, to help officers in the Union Finance Ministry and other Departments frame the broad contours of the Budget.

The Second Advance Estimate (SAE) of GDP is then released at the end of February. From this year, the NSO has moved the timeline for releasing the revised estimate for previous fiscal. Earlier, the First Revised Estimate for the previous fiscal, was released in January-end — this has now been clubbed with the release of the Second Advance Estimate and revisions for previous years in February-end.

As per the NSO, the FAE are based on “very limited data”, and are reached by using Provisional Estimates (PEs) of 2021-22 and are extrapolated using the relevant indicators. To compile the SAE for 2022-23, the PEs of 2021-22 used at the time of First Advance Estimate have been replaced by the First Revised Estimates for 2021-22, which have been compiled using detailed industry-wise/ institution-wise information.

“Thus, variations in SAE from FAE are attributed to revision of benchmark estimates and additional data available on various indicators like CPI, IIP, Revised Estimates of fiscal data, financial results of listed companies etc. used for compiling the estimates for 2022-23,” the NSO said.

What have experts said on the revisions?

Experts are of the view that not much should be read into the First Advance Estimates of GDP since they are based on extrapolation. A crucial component of GDP data — corporate results — start trickling in for Q3 from mid-January onwards, and hence, the Second Advance Estimates are a better indicator of GDP growth in a financial year.

“Since the Budget was to be presented early (on the first day of February), the First Advance Estimate was moved forward to mid-January. Revisions are part of the usual GDP data releases. But corporate results of Q3 start coming in mid-January onwards, and the Second Advance Estimate presents a better picture of the GDP performance. With annual GDP growth estimated to remain at 7% for FY23, the Q3 growth has come in the lowest in three quarters, which in our view shows that economic recovery is still fragile,” Devendra Kumar Pant, Chief Economist, India Ratings said.

The economic recovery ahead will depend on how policy actions, both monetary and fiscal, pan out, and it remains to be seen whether they are able to mitigate risks to have better impact in terms of growth, he added.