Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Issues with India’s GDP data

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Issues with India's GDP data

Context

There are three major reasons why the GDP data, and hence any narrative of economic recovery based on it, are questionable.

Background

  • The NSO released the current GDP series in 2015, using 2011-12 as its base year.
  • Some have argued that the problem in the new series is the real growth rate. This is debatable.
  • Scholars have pointed to measurement problems, both in the nominal and real GDP growth rates.

Three issues with the GDP data, and  narrative of economic recovery based on it

[1] Double deflation problem

  • The new series entailed a shift from a volume-based measurement system to one based on nominal values, thereby making the deflator problem more critical.
  • Simply put, the NSO calculates real GDP by gathering nominal GDP data in rupees and then deflating this data using various price indices.
  • The nominal data needs to be deflated twice: Once for outputs and once for inputs.
  • But the NSO — almost uniquely amongst G20 countries — deflates the nominal data only once.
  • It does not deflate the value of inputs.
  • To see why this is a problem, consider what happens when the price of imported oil goes down.
  • In that case, input costs will fall and the profits recorded by Indian firms will rise.
  • This increase in profits is merely the result of a fall in input prices, so it needs to be deflated away.
  • But the NSO doesn’t deflate away the increase in profits.
  • Since the cost of inputs is measured by the WPI (wholesale price index), a crude measure of the overestimation caused by the absence of “double deflation” is given by the gap between the WPI and the CPI (consumer price index).
  • In the 2014-2017 period, oil prices plunged, causing the WPI to fall sharply relative to the CPI.
  • This meant that real growth was probably overstated.
  • In the last few months, the exact opposite has been happening. WPI inflation is soaring.
  • The rapid increase in the WPI relative to the CPI is imparting an upward bias to the deflator.

[2] Sectoral weight not updated

  • When it calculates GDP, it takes a sample of activity in each sector, then aggregates the figures by using sectoral weights.
  • To make sure that the weights are reasonably accurate, the NSO normally updates them once a decade.
  • It has now been more than 10 years since the weights were changed, and there are no signs of a base year revision.
  • As a result, the sectoral weights are still based on the structure of the economy in 2010-11, when in particular the information technology sector was much smaller.

[3] Measurement of unorganised sector

  • Measurement of the unorganised sector has always been difficult in India.
  • Once in a while, the NSO undertakes a survey to measure the size of the sector.
  • In the meantime, it simply assumes that the sector has been growing at the same rate as the organised sector.
  • However, starting in 2016 the unorganised sector has been disproportionately impacted by a series of shocks.
  • In 2018, the NBFC sector reported serious problems, which in turn impacted unorganised sector firms since they were heavily dependent on NBFCs for funds.
  • From 2020 onwards, the pandemic has impacted the unorganised sector more than the organised sector enterprises.
  • Despite these shocks, the NSO does not seem to have made any adjustments to its methodology for estimating the growth of the unorganised sector.

Consider the question “Elaborate the issues with India’s GDP data. Suggest the way forward.”

Conclusion

There are serious problems with India’s GDP data. Any analysis of recovery or growth forecast based on this data must be taken with a handful of salt.

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