September 25, 2022
Business

The deflator angle to India’s GDP controversy – Shri. V. P Nandakumar

gdp3

Here lies the crux of the issue where India’s stated GDP growth rates appear to be on the higher side, a little too good to be true. Since real growth rate is arrived by taking the nominal number and deflating them by price indices, it is obvious that if inflation is understated, real growth rate will end up getting overstated. Many analysts believe that this is happening now. Here’s why.

In theory, all goods and services produced in the country must be deflated by the deflator that precisely captures their respective price changes. But, when you look closely at the workings of the deflator, it emerges that the deflator applied to the services sector has been lower than the industry deflator. This is surprising because manufacturing and industry have benefited from falling commodity prices and therefore should have experienced lower inflation than the services sector which benefit less from falling commodity prices.

Apparently, this has come about because the services deflator is derived more from the WPI than from the CPI.  Indeed, the services sector, which accounts for about 60 percent of the economy, is not covered in the WPI, yet the WPI is used as deflator for several service activities such as trade, hotels and restaurant, real estate and transportation. And so, in periods when WPI is declining, the services deflator understates the extent of inflation in the services sector and overstates the growth rate.

A December 2015 report by an international bank says that after making suitable corrections in the CPI/WPI ratio since the start of the new national accounts series, GVA deflators on average may have been underestimated by over 100bps. That is to say, real GDP growth could possibly have been overestimated by the same amount, that is 1 percent.

Of course, the recent uproar over the GDP growth rate reported for the December 2016 quarter has nothing to do with the deflator. This controversy is more about whether the CSO data has fully captured the impact of demonetisation on the unorganised sector that depended heavily on cash and where anecdotal evidence suggested significant dislocation. But that is another story for a later date perhaps.

 

nandaku1

      Shri. V.P. Nandakumar

     is MD & CEO of Manappuram Finance Ltd.

     and Chairman of the Kerala State Council of CII.

 

 

 

 

Photo Courtesy : Google/ images may be subject to copyright

 

 

 

Share

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *