Inflation has a starring role in 2023-24 growth
This fiscal year’s GDP deflator of 1.5% marks a drop from 7.2% in 2022-23 and contrasts with high CPI inflation. Revise price gauges—but for truth reflection, not bias confirmation
The Indian economy is growing from strength to strength, going by the most recent GDP data released by the statistics ministry. India’s growth rate is likely to have accelerated from 7% in 2022-23 to 7.6% in the current fiscal year ending on 31 March. This pace is all the more remarkable given that much of the advanced world is struggling to either stave off recession or wring inflation out of their economies by squeezing growth. However, India’s rapid rate of growth depends on inflation being a strikingly low 1.5%, the GDP deflator for 2023-24. This needs a closer look.
India’s nominal growth rate in 2023-24, as per the Centre’s second advance estimate of GDP, will be 9.1%. Real growth is estimated at 7.6%. The difference between the two is on account of economy-wide inflation, estimated at just 1.5%. This is remarkable, not only from the ordinary consumer’s recollection of egg prices having gone up from ₹72 per dozen to ₹96 per dozen, of tomatoes and onions having become obscenely expensive, before settling down to more sober prices, but also from the vantage point of the previous year’s deflator. Our economy’s nominal growth rate in 2022-23 was 14.2% and real growth 7%, so inflation for the year was 7.2%. What the latest advance estimates imply is that inflation has dropped from over 7% last year to 1.5% this year. Retail inflation readings had no such drop. The Reserve Bank of India’s policy rate for most of 2022-23 was 6.5%, which is where it stands today. So that remarkable reduction was not accompanied by monetary policy action, which aims at keeping the consumer price index (CPI) in control. A GDP deflation of 1.5%—done to adjust current data for a rising price ratio over a base-year—seems somewhat more plausible if one looks at inflation based on the wholesale price index (WPI), which has been in the negative zone for much of 2023-24, turning only mildly positive in recent months. There is also the question of how closely the CPI’s basket of items reflects real patterns of what the country consumes. Although the results of India’s 2022-23 survey of household expenditure on consumption cannot strictly be compared with those of previous such surveys, thanks to tweaks in methodology and the geography of rural and urban sites chosen for the sample, valid trends can be discerned. One such trend has been a decline in the share of food—particularly cereals—in the purchase basket of both rural and urban India. The share of food in the average rural basket has fallen from 59.4% in 1999-00 to 46.4% in 2022-23. The corresponding figures for urban areas are roughly 48.1% and 39.2%. This is a cue for us to reduce the weightage of food in the CPI. As food is its most volatile element, this would depress overall inflation.
It’s odd to have a GDP deflator showing an inflation path at odds with RBI’s policy focus. It suggests a need to revise our standard price gauges. In any such exercise, comparability with the past must not be sacrificed for a full reset. It could, for example, be argued that our lives revolve around phones and what we consume via these devices has gotten so affordable over the past decade that the inflation borne is lower than what the CPI says; phone price trends alone, adjusted for value offered, may have offset rising prices for other items. In other words, just as a low GDP deflator can make GDP growth dazzle, the prices it reflects could form a flashy picture of well-being.