There has been a recent barrage of stories on India, built on selective and deliberate misinterpretation of data.
To begin with, an article co-authored by a former Chief Economic Adviser raises questions about India’s first-quarter GDP growth rate of 7.8 per cent. We find serious flaws in the data interpretation.
First, the article’s argument that real GDP equals nominal GDP net of GDP price deflator is incorrectly measured because the GDP price deflator is significantly more volatile than the consumer price index. Interestingly, the authors demonstrate such volatility of GDP price deflator by plotting a graph of CPI inflation and GDP price deflator over a non-uniform time scale that is yearly, half-yearly and quarterly beginning in 2020-21 — a period that also witnessed events such as the pandemic and the Russia-Ukraine war. The motivation is quite clear: To pick and choose data to justify arguments.
Instead, when we remove this bias and normalise the data over a uniform time for the decade ending in 2022-23, the average gap between CPI headline inflation and the GDP price deflator falls from a peak of 5.5 per cent to a mere 0.9 per cent, indicating that volatility, if any, always normalises over time.
Interestingly, going a step further, if we substitute the volatile GDP price deflator with a stable CPI measure, we arrive at a much higher real GDP growth rate in 2022-23. The actual 6.2 per cent GDP growth in the second quarter of 2022-23 becomes 9.5 per cent and hence, there is a precipitous decline from a reworked 9.5 per cent in Q2 2022-23 to 7.8 per cent in Q1 of 2023-24, not a jump from 6.2 per cent to 7.8 per cent during the same period, as the NSO data shows. This data point, then, perfectly fits with the authors’ narrative that “the economy is actually decelerating rapidly”.
However, the GDP price deflator is a weighted deflator of the wholesale price index and the consumer price index, with the former having a much larger weight. It is for this reason that nominal GDP witnessed significant volatility during the periods of the Ukraine war and pandemic owing to global price uncertainties.
There is also an attempt to substantiate this line of reasoning by separately comparing expenditure components of GDP over yearly and quarterly periods. Again, as an example, if we make a like-to-like comparison of quarterly growth (y-o-y) of private final consumption expenditure in the first quarter of 2023-24 over the third quarter of 2022-23, we find an acceleration from 2 per cent to 6 per cent.
In another article, a reputed economist criticised the National Statistical Office for publishing an inflated GDP growth number for the first quarter. As per this analysis, if the NSO was to follow the procedure adopted by the US Bureau of Economic Analysis, the growth rate would drop to 4.5 per cent. The primary contention is that the expenditure side of the GDP underestimates the output value of GDP in the first quarter by as much as 2.8 per cent.
There are however many fallacies with this argument.
First, the average of all such discrepancies on a yearly basis since 1950-51 comes to around (-) 1.1 per cent. If we estimate on a quarterly basis beginning the beginning of the first quarter of 2011-12 till the first quarter of 2023-24, the average deviation comes to only 0.5 per cent. In comparison to the positive 2.8 per cent deviation in the first quarter, consider that between the second and third quarters of 2012-13, the discrepancy flipped from a negative of 4.8 per cent to a positive of 4.6 per cent. Were the numbers then just a statistical oversight?
Further, the first quarter estimate that has been released is not the final estimate. There are six revisions to the GDP data from the time it is first released. And such discrepancies are always adjusted over time.
Secondly, US GDP data that is often touted as the benchmark shows that the gap between GDP and GDI (gross domestic income) is typically about 1 per cent. However, post-COVID, this gap has been much larger. The average divergence between GDP and GDI for the decade ending in 2022 is around 0.8 per cent. However, this increased to 1.7 per cent in the first half of 2023. (On average, it has been 0.5 per cent in India in the last decade).
Lastly, we do believe that the growth estimate of 7.8 per cent in the first quarter is somewhat lopsided if one looks at leading indicators in various areas. This is particularly so for manufacturing, where the EBIDTA (earnings before interest, depreciation, taxes and amortisation) of ex-BFSI entities (excluding banking and financial services) has grown by around 15 per cent. For the record, in 2022-23, an upward revision in manufacturing imparted a 0.4 per cent upward bias to GDP. Assuming the same extent of revision, 7.8 per cent could climb up to 8.2 per cent.
We believe that such articles do not appreciate the methodology adopted in the computation of national accounts and are wrong to cast aspersions on the statistical body. The economic momentum is strong, and the country is likely to continue being one of the fastest-growing economies in the world.
The writer is Group Chief Economic Advisor, State Bank of India. Views are personal
