India’s GDP Controversy

Why in News?

Recently, an allegation has been made on the government that it is overstating its GDP growth rate after the release of quarterly data of GDP value.

What is GDP?

• Gross Domestic Product (GDP) is defined as total market value of all final goods and services in an economy.
• It is used to assess the size of economy.
• The performance of the country can be measured both from one year to another as well as among other countries.
• Growth of GDP – It can be either due to increase in actual production or due to increase in prices of goods and services or combination of both the above two factors.
• Nominal GDP – It is the value of GDP at the current prevailing prices.
• Real GDP – It is the value of GDP at some constant set of prices.
• It is calculated by removing the effects of price inflation from the nominal GDP using GDP or price deflator.

Real GDP growth rate = Nominal rate – Inflation (GDP Deflator)

• Since these prices remain fixed, if the real GDP changes, it is ascertained that the volume of production is undergoing changes.
• The GDP deflator – It is the ratio of nominal to real GDP.
• It gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year.

GDP Deflator = Nominal GDP / Real GDP

How is GDP calculated?

• Generally, GDP is calculated by 3 different methods –
  • Income method
  • Expenditure method
  • Production method
• In India, it is calculated through income and expenditure method.
• The National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) releases the economic growth data.
• The base year for GDP calculation is 2011-12.

Why is India’s GDP facing controversy?

• Issue of overstating GDP – The released GDP growth rate is 7.8% which implies that inflation was around 0.2% in the three months.
• But in the said quarter, retail inflation was around 4% in all 3 months, while wholesale inflation was negative.
• If one was to “deflate” nominal GDP using consumer price inflation, the real GDP would fall to less than 4%.
• But then if one goes by wholesale inflation, the real GDP will actually be much higher than 8%.
• Issue of GDP discrepancy – The GDP data obtained from the two methods vary due to issues such as lack of availability of data on time, etc.
• The difference between the GDP estimates from production method and income method is called “discrepancy”.

• The NSO in its latest report treats income as the right one and assumes that expenditure must be identical to income earned which is an obvious violation of international best practice.
• Issue with WPI – In recent times WPI (Wholesale Price Index) and CPI (Consumer Price Index) are not moving together suggesting that one of the indices is not reflecting the real price.
• It is unrepresentative of economy as it does not include services whose share in consumption basket is large and increasing.
• Calculation of WPI by Department of Commerce and Industry is based on Index of Industrial Production (IIP) which itself is in criticism.
• It does not provide information on rural and urban as well as the state level estimates, which are all relevant for public policy.

What lies ahead?

• More attention has to be given to India’s macroeconomic data.
• India’s inflation indices need to be updated periodically.
• Wholesale price index (WPI) must be discarded and has to be altered with a new Producer Price Index which is a measure of the change in prices that domestic producers receive for their goods and services.

Quick facts

References

1. IE| GDP Controversy
2. NCERT | Concepts of GDP