India’s Economic Growth Rate is Overstated

In a brilliant article in Mint, Rajeswari Sengupta, Assistant Professor at IGIDR, has shown that India’s real GVA growth rate is around 5% and not 7.1% as the CSO claims. The reason is the use of deflator in converting the nominal GVA to Real GVA.

In nominal terms, GVA increased by 7.9% in the third quarter (October-December) of the fiscal year 2015-16, below its usual level of 10-15%. This increase translated into a 7.1% real growth, because the deflator reportedly increased by only 0.7%.

Could India’s inflation be so low? In effect, the CSO is saying that despite India’s booming economy, producer inflation is lower than that of the recession-wracked economies of the West, or even that of Japan, which has been wrestling with deflation since the 1990s. This is not plausible.

It does seem extremely fishy that an emerging economy, growing at 7% (5%?) can have an inflation of 0.7%. The article then goes on to explain why this might be the case. In the absence of a credible deflator figures for all sectors, the CSO approximates it by using Wholesale Price Inflation as a proxy. This can be extremely problematic as the WPI has been on a downward trend in India and there is also significant divergence between the WPI on one hand and the deflator and CPI on the other. This divergence has been occurring since 2014 at least and I had written about it earlier.

If we were to use better proxies for the deflator instead of the WPI, like the CPI in services and IIP for manufacturing, we get a real GVA growth rate for the third quarter at 5% instead of 7.1%. The figure of 5% seems a bit more in tandem with reality.

Liked this post? Get the good stuff once a week by email.