Credibility of GDP numbers stands deflated

The latest set of GDP releases put out by the Central Statistics Office (CSO) for the first quarter of this fiscal has heightened growth concerns, no doubt. Sceptics of the Centre’s GDP forecast for FY18 too have been vindicated, as real GDP growth slipped to 5.7 per cent in Q1 of FY18 from 6.1 per cent in the previous quarter. Economists and the Reserve Bank of India are now likely to get back to number crunching and revise growth estimates downwards for FY18.

But just as the Centre, the RBI and industry need to turn their attention to address rising growth concerns, issues with the CSO’s GDP data require as much attention.

Take for instance, the nominal GDP growth figure put out by the CSO for Q1. From a high of 12.5 per cent recorded in Q4 of FY17, growth in nominal GDP is down to 9.3 per cent in Q1 of FY18. Some would argue that with growth in real GDP down from the previous quarter and inflation hovering at low levels, the growth in nominal GDP is bound to have taken a knock too.

So where is the weak link?

In May, when the CSO had sharply revised GDP growth numbers for the fourth quarter of FY17, from 7 per cent to 6.1 per cent, the one thing that stuck out like sore thumb, was the fact that despite the revision in real GDP growth, the number for nominal GDP growth stood rock steady at 12.5 per cent (down only marginally from the earlier estimate). Why?

The GDP deflator (ratio of nominal to real GDP) — another measure of inflation — was revised sharply from 5.4 pegged earlier to nearly 6 per cent for Q4. With such a move at odds with the underlying CPI and WPI (new) inflation trends, it was unclear what promoted such a sharp revision in the first place.

A back of the envelop calculation of deflator using CPI and WPI by assigning 70 percent weightage to the latter, suggest a 4.5-odd per cent deflator for Q4 of FY17, far lower than the 6 per cent that the CSO had factored in.

Some would argue that directionally, the deflator was in sync with the underlying trend in WPI (new series base 2011-12) that moved up substantially in the Jan-March 2017 quarter.

But in the past, the RBI has highlighted the need for a careful review of the use of WPI, which does not include services, as the price index for arriving at current/constant price estimates of GDP/GVA.

In its Oct 2015 report the RBI stated that “in India, to obtain quarterly GVA estimates at current prices from constant prices estimates, WPI is widely used for many sectors.

This tends to overstate the extent of price decline in the GDP deflator when WPI is in deflation. Services, which account for over 60 per cent of GVA, are not covered in WPI; yet the WPI is used as deflator for several services activities such as trade, hotels and restaurant, real estate and transportation. Whereas the quarterly GDP/GVA deflator should represent the entire gamut of goods and services produced in the country and provide the most comprehensive measure of inflation in the economy, it is not so by construct.”

Given all of this, the reason for the sharp uptick in Q4 deflator warranted a better explanation by the CSO when it bumped it up significantly. Importantly, within sectors, the GVA deflator for Q4 underwent substantial revisions. For mining and quarrying for instance, the Q4 deflator was a high 25 per cent, after a negative 16.2 per cent and 7.9 per cent in the first and second quarter.

Given that the Q4 deflator still remains a mystery, the sharp fall in the GDP deflator for Q1 of FY18 to 3-odd per cent levels (GVA deflator at 2.2 per cent), warrants a closer look. More so, because this has pulled down the growth in nominal GDP sharply to 9.3 per cent in Q1.

True, in the April-June 2017 quarter, both WPI and CPI have trended lower, reflecting somewhat in the GVA/GDP deflator. But this still does not explain the sharp revisions in the GVA deflator within sectors.

The GVA deflator for agriculture slipped to negative 2 per cent in Q1, possibly on collapse of food prices. But what explains the sharp downward revisions in GVA deflators of other sectors that seen a steep increase in the previous quarter?

Q4 (FY17) deflator for mining and quarrying that had shot up sharply is down again substantially to 11.8 per cent 1Q.

There are wide variations within construction, trade, finance & real estate and electricity too.

Such sharp revisions at the CSO’s whims and fancy without ample explanation lowers the credibility of its GDP data.

COMMENT NOW