The ‘noise’ in April-June GDP: Taking a closer look at the numbers

The GDP growth figure usually cited in headlines is after adjustments have been made for inflation to arrive at the ‘real GDP growth’, or just GDP growth in normal parlance. This number is more relevant from the perspective of how well the economy is doing as it allows for comparisons across years and with other countries.

However, the GDP data released last week by the statistics ministry warrants a look at the number without adjusting for inflation – or at the ‘nominal’ GDP growth. While the ‘real’ GDP growth rate, at 7.8 per cent, was the highest in five quarters, the ‘nominal’ GDP growth rate in April-June was at a three-quarter low of 8.8 per cent.

The GDP data collected by the statistics ministry is in ‘current prices’, or the prices prevailing today. In April-June, the GDP in current prices was Rs 86.05 lakh crore. To arrive at the real growth rate, the ministry ‘deflates’ the nominal GDP by a combination of wholesale and retail inflation, with the former playing a significantly larger role. The real GDP in April-June was Rs 47.89 lakh crore.

In April-June, Wholesale Price Index (WPI) inflation in India averaged less than 0.3 per cent, the lowest since the first quarter of 2024. Meanwhile, Consumer Price Index (CPI) inflation averaged 2.7 per cent, the lowest in more than six years. As a result, the ‘GDP deflator’ was just 0.9 per cent – the lowest in roughly six years. Smaller the deflator, narrower is the difference between the real and nominal GDP growth rates. But why does this matter?

The ‘deflator’

According to economists at ICICI Securities Primary Dealership, the April-June real GDP growth rate has been lifted by certain “shortcomings” in how the Ministry of Statistics and Programme Implementation (MoSPI) deflates the nominal GDP. “As it turns out, most of the upside surprise in the quarter has stemmed from segments where the very soft deflator value could have buoyed the real growth estimate. Importantly, nominal growth was quite lacklustre and may well become the more suitable metric to track this year to assess the direction of growth,” their economists, led by A Prasanna, said in a note on August 31.

Take, for instance, the services sector, whose real growth rate in April-June was at an eight-quarter high of 9.3 per cent. However, without adjusting for inflation, the sector expanded by 11.3 per cent, not too far off from the 11.2 per cent growth recorded in October-December 2024. For this sector, the deflator was roughly 1.9 per cent. However, economists argue this is far lower than what it actually should have been.

“India’s services sector GDP deflator aligns more with goods-oriented WPI inflation than with CPI services inflation. Another way of saying this is that it has much more manufacturing in it than it should. This is particularly a problem when manufacturing inflation is falling because of softer commodity prices. It ends up deflating services inadequately, leading to exaggerated real growth,” HSBC economists Pranjul Bhandari, Aayushi Chaudhary, and Priya Mehrishi pointed out in a note on August 29.

Bhandari, Chaudhary, and Mehrishi estimate that CPI services inflation in April-June was 3.4 per cent, almost double the deflator used for the services sector in the GDP data. If 3.4 per cent is used to deflate the nominal GDP of the services sector in April-June, its real growth rate falls to around 7.8 per cent and the overall GDP growth rate to around 7 per cent, which is still a reasonably high number.

Single versus double

At the root of the problem is how MoSPI deflates the nominal GDP. In agriculture and mining and quarrying, different deflators are used for inputs and outputs – or a double-deflation method. For the rest, the same deflator is used for both input and output prices – or single deflation. The latter, economists worry, is problematic.

“It is very likely that the statistics office has not suitably deflated the rise in profit margin that is stemming from weaker input prices, rather than stronger volume growth,” ICICI Securities Primary Dealership said, adding that if MoSPI had “more appropriately followed a double deflation approach”, then the growth in real value added by the manufacturing sector may have been “much less” than 7.7 per cent in April-June. According to HSBC, manufacturing sector growth in April-June may have been overstated by around 150 basis points (bps), with the headline real GDP growth number exaggerated by around 20 bps just due to this issue.

The opposite holds true when commodity prices are on the rise – when WPI inflation is high and above CPI inflation, it can lead to real growth being understated due to the single-deflation method being used, leading to lower real manufacturing growth on paper that may not reflect any actual weakness in activity.

More of the same

So, will the GDP numbers for July-September and for the rest of the year suffer from the same problem? The short answer is yes.

WPI inflation dropped to -0.13 per cent in June – the first time in 20 months that it had come in negative territory – indicating wholesale prices were lower compared to last year. In July, prices fell even more, with the inflation rate declining to -0.58 per cent. CPI inflation, meanwhile, fell to an eight-year low of 1.55 per cent in July. And while it may rise from here, the Reserve Bank of India (RBI) expects CPI inflation to average 3.1 per cent in 2025-26, 150 bps lower than the average for 2024-25.

As such, the GDP deflator may remain low and possibly fall further, meaning that the “disconnect between real GDP and high frequency data is likely to continue”, according to Nomura economists Sonal Varma and Aurodeep Nandi.