The first quarter estimates of GDP for 2023-24, raise two broad issues. The first relates to differences in GDP estimates based on activity or income approach and the expenditure approach and persistence of discrepancies in these two numbers.
The second issue is more methodological, relating to the use of deflators to arrive at GDP estimates at constant prices. As a corollary, these two issues result in a possible overestimation of GDP growth as a result of questionable deflators in certain instances.
GDP measurement in India with its current base of 2011-12, generally follows the System of National Accounts 2008 as set by the IMF and the deviations are clearly spelt out in the publication of Ministry of Statistics and Programme Implantation (MoPSI) relating to methodological issues in 2015. For more than a decade, this approach has been consistently followed.
MoSPI has always held the view that the income-based approach is more robust relative to the expenditure-based approach. Any difference in GDP is, therefore, reflected in expenditure approach as discrepancies, which may move on either side as positive or negative. Being random, these over time may not affect the trend growth, though at quarter or on annual basis there may be differences.
The data of GDP growth excluding the discrepancies, or GDP growth on income basis and on expenditure basis from 2012-13 to 2023-24 (Q1), indicate that on an average, growth has only marginally differed. The average growth of GDP based on income approach in 45 quarters since Q1 of 2012-13 at 5.88 per cent has only been a shade lower than the GDP growth on expenditure approach. Even at current prices, average GDP growth on income and expenditure approach has been 11.10 per cent and 10.91 per cent, respectively.
Quarterly GDP growth based on income and expenditure approach since 2015-16 is given in the Chart. The narrow difference in trend growth in these two approaches, despite structural issues that were witnessed during this decade including GST rollout, demonetisation of high value currencies and the pandemic generally, indicate that notwithstanding the methodological issues, there has been consistency.
Use of deflators
MoSPI uses sector-specific deflators, but except for the primary sector covering agriculture and mining where a number of deflators are used, it is a single deflator approach. However, within single deflator, where value added is deflated, it uses Wholesale Price Index and Consumer Price Index. WPI is usually used in production sectors and CPI is used in services sectors. In the expenditure approach of GDP, consumption is deflated by CPI to arrive at inflation neutral numbers.
Overall implicit GDP deflator for income approach has averaged 4.87 during this period (2015-16 onwards) as compared to 5.27 for consumption. Normally, production should be deflated with Producers Price Index. WPI is currently a proxy for that. There is a view that these deflators are more than a decade old. However, the base year is the same (2011-12) for GDP, WPI and CPI. A more recent base would certainly be desirable. But these have been disclosed upfront, are in the public domain and there has been no deviation from this practice.
There are, however, two issues which are pertinent at this stage. First, there has been a deceleration in growth in GDP measured in terms of expenditure consistently for the last four quarters. The growth measured in terms of expenditure (as this is excluding discrepancies) has averaged 3.5 per cent compared to an average income based GDP growth of 6.14 per cent during the last four quarters, in contrast to their showing a broadly similar reading during the preceding period. This is on account of wide fluctuations in WPI, as opposed to a steadier trend in CPI.
Since the CPI-based deflator is used almost wholly on items on the expenditure side, against the WPI-based deflator being largely used on the income side, the GDP is likely to be low on the former count.
With consumer price inflation likely to remain elevated for another quarter, the possibility of the expenditure-based real growth reaching a higher level is somewhat difficult. Whether this acts as a drag on future incomes through capital formation is a moot question.
This brings us to the second second issue — a lower implicit deflator for producers, because of a lower WPI, should result in accrual of economic rent to the corporate sector. The share of value added accrues more to capital than to labour, as is borne out by MCA 21, ASI and other data.
There is indeed evidence that the first quarter results of the corporate sector show an upsurge in their earnings in the quarter ended June 2023, lifted by a significant improvement in operating performance. Companies’ data including banks and financials indicate that their net profits increased by more than one-third.
Overall, Q1 2023-24 has been positive for the market, with most companies delivering better profitability growth than revenue because of relatively moderate growth in cost of raw materials.
But the real crux lies in whether that increased profit gets translated into higher capex. The internal accruals of the corporates have been witnessing a significant increase.
In fact, the share of private non-financial corporates’ own savings to their gross capital formation has averaged 90 per cent in the last five years, though their ratio of gross capital formation to value added has persistently declined from 45 per cent during 2011-14 to 33 per cent in 2019-2022. The internal accruals have substituted bank finance but have not to that extent contributed to an increase in capex.
Overall, the share of gross fixed capital formation to GDP has been struggling to cross the 30 per cent lower benchmark. With incremental capital output ratio sticking around 6.1 and without an increase in capex, chances of sustained growth are limited. The economic rent of corporates is not being transformed into capital formation.
Gopalan is former Secretary, Economic Affairs. Singhi is former Senior Economic Adviser, Ministry of Finance. Views are personal