Fickle growth needs GDP math revamp
‘Resilient’ and ‘strong’ are two words often used to describe the Indian economy’s growth. More so because the growth rate surpassed street estimates for much of 2023, helping Narendra Modi’s government build an aura of being a global standout ahead of the crucial General Elections. However, the estimation of gross domestic product (GDP) is riddled with issues that keep showing up once in a while, with little to no solution possible without a structural overhaul. Take the quarter ended December 2023, during which the economy grew 8.4% as per an estimate released last month. At face value, it should bring cheer to all quarters. But greater scrutiny makes the story complex. Another indicator of output—gross value added (GVA)—grew just 6.5%. The gap between the two growth figures was the biggest since the January-March 2021 quarter. The problem is not limited to just the December quarter: the gap has become more pronounced since the pandemic due to the volatility in tax collections and subsidies, a Mint analysis shows. (GDP is GVA plus taxes on products minus subsidies.)
Another issue that gets overlooked but has had its fair share of influence on GDP growth is the head called ‘discrepancies’. The statistics ministry estimates GDP using two methods (via income and via expenditure), which leads to different readings. To get over the inevitable mismatch, the gap gets labelled as ‘discrepancies’. To be sure, the discrepancy is larger in initial estimates and gets somewhat corrected with subsequent revisions. But more often than not, this, too, has led to higher GDP growth figures.
Context Matters
THE DIFFERENCES between GDP and GVA and estimates arrived from the income and expenditure methods are some of the many problems in the current GDP series. While the headline GDP figure is generally looked at for economic growth, GVA, which is the value of goods and services produced in the economy, may show a more reliable picture when net taxes (taxes minus subsidies) become volatile, economists said.
Discrepancies are volatile too, with their share ranging from (-)3.4% to 3.4% of GDP since 2011-12. When discrepancy is negative, it lowers headline GDP estimates; when it is positive, it boosts the figure. Even as it tends to inflate GDP estimates more often, it can also lead to a lower estimate in some cases, pointing to limitations in methodology rather than a deliberate attempt to paint a rosy picture of the economy. Countries such as the UK and the US have also been criticized for persistently large discrepancies in the 1980s and 1990s, according to a report by the International Monetary Fund. While the mismatch can’t be avoided, its size should be contained. Soon after the release of the 2011-12 GDP series (i.e. the GDP data with the 2011-12 base year), the then-chief statistician T.C.A. Anant had said the government was making efforts to reduce discrepancies—but it remains unaddressed. When discrepancy is particularly huge, excluding it while looking at the year-on-year growth could be beneficial. Some economists also look at growth in ‘core GDP’, which excludes volatile components such as discrepancies and valuables.
While the headline GDP growth figure is the main indicator of the growth in the Indian economy, closer scrutiny is essential under certain situations, owing to lack of data or volatility in data.
Revision Rage
THE MINISTRY releases six estimates for GDP for each fiscal year: two advance estimates while the year is still on, provisional estimates soon after the year ends, and three revised estimates over the next three years. While the latest quarterly and yearly growth usually gets everyone’s attention, the revisions made to these initial numbers often go unnoticed.
For example, the initial growth figures for Q1 and Q2 are calculated against provisional data for the respective year-ago periods. But by the time the Q3 data is released in the following February, not only do the numbers for the current year get revised but also the numbers for the past three years. All quarterly GDP numbers—both for the ongoing year and the preceding ones—then get shaken up, and the new growth rates can look different from the initial estimate. Even though the revisions usually lead to higher GDP estimates as more data gets captured with time, the growth rates depend on the changes made in the base year as well and can be revised in both directions.
Given the confusion these revisions cause, the statistics ministry last month announced that it was discontinuing the third revised estimate (it was scheduled to release the third and final revised estimate for 2020-21 last month, but didn’t). Even as revisions in GDP data capture the economic activity better, it is the initial estimates that tend to stick in people’s minds, a statistics ministry official said, adding that it was a step towards reducing the number of revisions in GDP data to reduce confusion.
While it may not be possible to perfectly capture the economic growth in the country, the issues in the current GDP series need to be looked at closely for any improvement possible but most of them will have to wait until we move from the 2011-12 series to a new series, the official added.