HIGHER DEFLATOR PULLED DOWN GROWTH IN 2005-14

CSO has in­creased the GDP deflator by nearly 90 ba­sis points in the se­ries, thus bring­ing down growth at con­stant prices

Business Standard - - FRONT PAGE - KR­ISHNA KANT

The three sig­nif­i­cant part of the down­ward re­vi­sion in In­dia's head­line eco­nomic growth be­tween 2004-05 and 2013-14 can be at­trib­uted to the up­ward re­vi­sion in the gross do­mes­tic prod­uct

(GDP) deflator (un­der­ly­ing in­fla­tion), as eco­nomic growth at cur­rent prices re­mains broadly sim­i­lar at about 15 per cent in both the se­ries.

Ac­cord­ing to the Cen­tral Statis­tics Of­fice's (CSO's) re­vised es­ti­mates, based on the 201112 se­ries, the econ­omy was grow­ing at 15 per cent at cur­rent or nom­i­nal prices dur­ing the 2005-14 pe­riod against ear­lier es­ti­mates (2004-05 se­ries) of 14.9 per cent.

This, how­ever, does not trans­late into faster growth than es­ti­mated at con­stant prices, as the GDP deflator has been re­vised up­wards to 8.4 per cent from 7.5 per cent ear­lier. Economists are not con­vinced about the re­vised data. KR­ISHNA KANT writes

A sig­nif­i­cant part of the down­ward re­vi­sion in In­dia's head­line eco­nomic growth be­tween 2004- 05 and 2013-14 can be at­trib­uted to the up­ward re­vi­sion in the gross do­mes­tic prod­uct (GDP) deflator (un­der­ly­ing in­fla­tion), as eco­nomic growth at cur­rent prices re­mains broadly sim­i­lar at about 15 per cent in both the se­ries.

Ac­cord­ing to the Cen­tral Statis­tics Of­fice's (CSO's) re­vised es­ti­mates, based on the 2011-12 se­ries, the econ­omy was grow­ing at 15 per cent at cur­rent or nom­i­nal prices dur­ing the 2005-14 pe­riod against ear­lier es­ti­mates (2004-05 se­ries) of 14.9 per cent.

This, how­ever, does not trans­late into faster growth than es­ti­mated at con­stant prices, as the GDP deflator has been re­vised up­wards to 8.4 per cent from 7.5 per cent ear­lier (See chart).

Economists are not con­vinced about the re­vised data. “We are con­cerned with the growth trajectory — when it picked pace and it fal­tered. The growth trajectory (for 2005-14 pe­riod) is broadly the same in both the GDP se­ries, thus pro­ject­ing sim­i­lar lev­els of eco­nomic ac­tiv­ity," said an econ­o­mist who tracks the do­mes­tic econ­omy.

The up­ward re­vi­sion in the deflator, how­ever, means that the CSO be­lieves the un­der­ly­ing in­fla­tion or price in­crease was greater dur­ing the 2005-14 pe­riod than the ear­lier es­ti­mates.

The head­line eco­nomic growth is de­rived by sub­tract­ing the deflator from the GDP growth at cur­rent or nom­i­nal price.

Ad­justed for the new GDP deflator, In­dia's eco­nomic growth dur­ing 200514 de­clined to 6.7 per cent, com­pared to ear­lier es­ti­mates of 7.5 per cent. This turned out to be lower than head­line eco­nomic growth of 7.3 per cent in the past four years (2014-18).

The rel­a­tive growth num­bers change com­pletely if eco­nomic growth at cur­rent or nom­i­nal prices is ad­justed or de­flated by the un­der­ly­ing re­tail in­fla­tion or con­sumer price in­dex (CPI)-based in­fla­tion in the cor­re­spond­ing pe­riod.

Ad­justed for re­tail in­fla­tion, GDP growth at con­stant prices de­clined to 6.5 per cent dur­ing 2005-14, but was higher than the cor­re­spond­ing growth rate of 5.8 per cent dur­ing 2014-2018.

This is be­cause of a 450 ba­sis points de­cline in growth at cur­rent or nom­i­nal prices to an av­er­age of 10.5 per cent, low­est in at least two decades. (See chart).

Ac­cord­ing to the CSO, the eco­nomic growth rate picked pace in the past four years be­cause of a sharp de­cline in the GDP deflator or un­der­ly­ing in­fla­tion in the econ­omy. It es­ti­mates the deflator to be around 3.2 per cent per an­num in the past four years, less than half of the pre­vi­ous decade and the low­est in nearly two decades.

In the re­vised se­ries, the GDP deflator (in 2005-14) is now closer to the con­sumer price in­dex dur­ing the pe­riod. The CPI or re­tail in­fla­tion dur­ing the pe­riod was 8.6 per cent, only 20 ba­sis points higher than the es­ti­mated GDP deflator.

In con­trast, the GDP deflator for 201418 at 3.2 per cent per an­num re­mains lower than the re­tail in­fla­tion of 4.7 per cent.

His­tor­i­cally, the GDP deflator has al­ways been lower than the un­der­ly­ing CPI dur­ing the cor­re­spond­ing pe­riod. Ex­perts at­tribute the gap be­tween deflator and con­sumer in­fla­tion to the way the two vari­ables are mea­sured.

“The GDP deflator gives higher weigh­tage (up to 70 per cent) to changes in whole­sale prices; re­tail prices only play a mi­nor role here,” said Dhanan­jay Sinha, head of re­search at Emkay Global Re­search.

While the GDP deflator is cal­cu­lated by the CSO, the data on re­tail in­fla­tion is pro­vided by the labour depart­ment.

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