New GDP series: 28 out of 30 mfg categories used double deflation

Why in the News

The Ministry of Statistics and Programme Implementation (MoSPI), the ministry that compiles India’s national accounts, has released its Sources and Methods for Compilation of National Accounts Statistics document. It records that the new Gross Domestic Product series applied double deflation in 28 of 30 manufacturing categories. The new series, with 2022-23 as its base year, was released in February, so the methodology document followed seven months later, the shortest turnaround MoSPI has managed. Until this series, double deflation was used only for agriculture and for mining and quarrying, which was among the most cited criticisms of Indian growth data. The tension is that a methodological upgrade making real growth more accurate has arrived alongside a downward revision of nominal output that critics read as flattering the current growth print.

What is double deflation?

1. Gross Value Added: The value added by a sector is the value of its output minus the value of the inputs it uses. Measured at current prices, this is nominal Gross Value Added (GVA).
2. The adjustment: To reach real GVA, the output value and the input value are each adjusted by their own inflation rate. Adjusting the two separately is what makes the method double deflation.
3. Single deflation, the alternative: Under single deflation both input and output values are adjusted by the same price index, so the method assumes input and output prices move together.

Why did single deflation distort India’s real growth estimates?

1. The earlier practice: MoSPI applied double deflation only to agriculture and to mining and quarrying. Every other sector was deflated using a single number drawn from the Wholesale Price Index or the Consumer Price Index.
2. Where the assumption breaks: Single deflation misstates real growth whenever input prices and output prices change at different rates, which is exactly what happens in a commodity price shock.
3. The direction of the error: A manufacturer whose input costs fall faster than its selling prices shows an inflated real value added under single deflation, because the saving on inputs is not being deflated separately.
4. Why this was the standing criticism: India’s growth estimates were repeatedly questioned on this ground, since the country was measuring real manufacturing growth by a method the major statistical systems had already moved past.

Why do two manufacturing categories remain outside double deflation?

1. The two exceptions: Double deflation was not applied to production, processing and preservation of meat, fish, fruit, vegetables, oils and fats, and to manufacture of pharmaceutical, medicinal chemicals and botanical products.
2. The stated reason: In both categories the share of imported inputs is high, which makes it challenging to map input items directly to their item level Producer Price Index.
3. The status: MoSPI has stated that work is under way so that double deflation can be extended to the remaining two categories as well.

What does the new series say about the size of India’s informal sector?

1. Household sector as the proxy: National accounts split output across the household, private and public sectors, and the household share is the working proxy for the informal economy.
2. The revision: Nominal GVA attributed to households in 2022-23 was reduced by Rs 2.9 lakh crore against the old series, a decline of 2.7 percent.
3. Construction drove the cut: The household share in construction GVA fell to 59 percent from 79 percent under the old series, which reads as construction being more formal than earlier estimated.
4. The offsetting movement: Trade and repair services, hotels and restaurants, and road transport are recorded as more informal than the old series estimated, so the revision redistributes informality rather than uniformly reducing it.

Why does the methodology document matter for confidence in the series?

1. Speed of release: The document came seven months after the new series. Earlier full documents have taken up to three years after a new series was published, during which the methodology behind a live growth number was not publicly checkable.
2. What it contains: It sets out the concepts, definitions, data sources, methodologies and compilation practices of the new series. It carries no new data.
3. Its source material: It consolidates three reports of sub committees of the Advisory Committee on National Accounts Statistics, covering methodological improvement for the base revision, constant price estimates, and the incorporation of new data sources, rates and ratios. Those three were published in February.
4. The live criticism: The new series has been attacked for revising nominal GDP downward for earlier years, which reduces the measured size of the economy. A lower nominal base for April to June 2025 is read by some as the reason the 7.8 percent real growth print for April to June 2026 looks faster than expected.

Challenges to double deflation in India’s national accounts

1. No official Producer Price Index: India deflates using the Wholesale Price Index and the Consumer Price Index, neither of which measures prices received by producers for their own output. Eg. The two categories left out of double deflation were left out precisely because item level producer price mapping was not possible.
   The Fix: Complete the transition to a full Producer Price Index series with item level coverage, so deflation rests on producer prices rather than on wholesale transaction prices.
2. Imported input prices are not captured: Domestic price indices do not track the cost of imported inputs, so an import intensive sector is deflated by prices it does not actually pay. Eg. Bulk drug intermediates for Indian pharmaceutical manufacturing are largely imported.
   The Fix: Build an import unit value index at the same item level and use it to weight the input deflator for import intensive categories.
3. Base revisions move the level, not only the method: A revision that improves method and changes the measured size of the economy at the same time makes the two effects impossible for a user to separate. Eg. The Rs 2.9 lakh crore reduction in household GVA for 2022-23 arrived together with the deflation change.
   The Fix: Publish a back series on the new methodology for a decade of prior years, so the level effect and the method effect can be read apart.
4. Survey frames lag the economy: The household and enterprise surveys that feed value added estimates are conducted at long intervals, so structural shifts are picked up only at a base revision. Eg. The construction sector’s formalisation was recorded only when the base year moved to 2022-23.
   The Fix: Move the enterprise survey to a rolling annual panel so sectoral shares are updated continuously rather than once a decade.
5. Documentation is not the same as data access: A document setting out sources and methods still leaves external researchers unable to reproduce the estimates without the underlying unit level data. Eg. The document explicitly contains no new data.
   The Fix: Release anonymised unit level datasets for the corporate and enterprise sources on a fixed lag, so the published estimates are independently replicable.

Conclusion

India has moved its manufacturing accounts onto the deflation method the criticism had been demanding, and it has published the reasoning faster than it ever has. The upgrade stops short of the import intensive categories, and it still rests on price indices that were never built to measure producer prices. The thing to watch is whether the remaining categories are brought in and whether the Producer Price Index transition is completed, since both decide whether the improvement holds at the next base revision.

Back2Basics: Producer Price Index

1. What it measures: A Producer Price Index tracks the change in prices received by domestic producers for their output at the first point of sale, before taxes and trade margins are added.
2. Difference from the Wholesale Price Index: The Wholesale Price Index tracks transaction prices in wholesale markets and includes imported goods, so the same item can be counted at several stages. A Producer Price Index covers only domestic production and avoids that multiple counting.
3. Status in India: India officially publishes the Wholesale Price Index and the Consumer Price Index. A shift to a Producer Price Index has been recommended by an official working group and remains under development.

Matching Previous Year Question

“[2021, GS3, 10 marks] Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”