Amid GDP row, govt hits out at critics but concedes its data insufficient to gauge economic activity

Two articles, one by visiting Princeton prof & another by ex-CEA, question India’s GDP calculation. 'Critics latch on to anything that doesn't paint economy in good light,' says govt.

A labourer welds an iron pillar at a building material factory in an industrial area in Dasna, in Uttar Pradesh | Reuters

New Delhi: The ministry of finance issued a stern rebuttal to critics of India’s gross domestic product (GDP) data, saying such critics want to “latch on to anything that does not paint the Indian economy in a good light”. However, it also did admit that its GDP numbers were not sufficient to assess economic activity. 

The Modi government has, over the past few weeks, been facing a lot of criticism from various quarters over different aspects of how it measures and presents its GDP data. The ministry of finance Friday evening took to X with a long post defending its numbers and taking the critics to task. 

The first wave of criticism came following a 6 September article by Ashoka Mody, a visiting professor at Princeton University, which accused the Modi government of performing a “branding and beautification exercise” on the latest GDP numbers for the April-June 2023 quarter — ahead of the G20 summit that took place in New Delhi on 9-10 September.

Mody’s main contention was that the method used by the government to calculate the relatively strong 7.8 percent growth rate — the income side approach — was deliberately chosen because it yielded a higher growth rate than the alternative, the expenditure side approach.

The two methods basically differ on the basis of what they are measuring. The income side approach tries to estimate GDP by measuring the incomes of the government, people and companies. The expenditure side approach tries to measure GDP through the spending that is done by these entities.

The second round of criticism of the GDP numbers began with an article published Thursday in the Business Standard, written by former chief economic advisor to the government of India, Arvind Subramanian. 

In response to Mody’s post, the ministry of finance, in an article of its own and again in the Friday post on X, said that India has always used the income approach and that it does not switch methods based on convenience or optics.

The difference between the results yielded by the income and expenditure approaches is called a statistical discrepancy, which the government has been reporting with all its GDP releases, the post said. 

“These discrepancies are both positive and negative,” the post on X explained. “Over time, they wash out. In fact, in FY23 and FY22, the ‘statistical discrepancy’ was negative. In other words, growth as per the income approach was lower. Using the expenditure approach, it would have been higher than the 7.2 percent reported for FY23 and higher than the 9.1 percent reported for FY22.”

Regardless of the advantage the expenditure side approach might have provided during this period, the government continued using the income side approach, as is the norm, according to the government’s post.

“India consistently uses the income side approach for calculating GDP growth for various reasons,” the post added. “It does not switch between the two approaches depending on which one is favourable.”

Second wave of criticism

In his article Thursday, Subramanian, who was chief economic adviser to the Indian government from October 2014 to June 2018, pointed out that India’s nominal GDP growth and real GDP growth (which strips out the often-distortionary impact of inflation from the calculation) were nearly the same in the April-June 2023 quarter.

When looking at real and nominal GDP growth, there also arises a concept called the GDP deflator, which tries to estimate the extent to which growth is being propped up by inflation rather than an actual increase in output.

Subramanian, in his article, argued that the way India calculated its GDP deflator was incorrect and so it did not adequately capture the actual impact of inflation. If it did, he added, then India’s real GDP growth would have been much lower than the reported 7.8 percent.

This argument, the government said in its post, does not “stand up to scrutiny”.

“India’s GDP deflator is dominated by the Wholesale Price Index,” the government explained. “Wholesale Price Index peaked in the first quarter of 2022-23 due to the oil and food price increases in the wake of the war in Ukraine and supply-side disruptions. Prices began to come down from August 2022 onwards. Hence, WPI is now contracting year-on-year. It will soon pass once the statistical base effect disappears.”

In other words, the government explained that the Wholesale Price Index shot up in the months following the Russia-Ukraine war, and is now negative because the current data is being measured against that high base.

Further, it argued that if wholesale inflation had currently been higher, then that too would have attracted the criticism that nominal GDP was higher because of this inflation and not because of underlying economic activity. 

“MoSPI (Ministry of Statistics and Programme Implementation) calculates quarterly GVA (gross value added) in real terms first, and then, using the deflator, nominal values are obtained,” the post said. “No wonder nominal growth rates have slowed, with WPI contracting in recent months. This will normalise in the coming months.”

As such, to argue that nominal GDP growth is more reliable because India has issues with its calculation of GDP deflator is “to invent an argument where none exists”, the post said.

“This is just to justify the liking for nominal GDP growth because it has been moderating in recent quarters after the high growth in the first fiscal quarter of FY23,” it added. “In other words, critics want to latch on to anything that does not paint the Indian economy in a good light.”

The post added that, had the critics looked at other, more high-frequency indicators such as the Purchasing Managers’ Index, bank credit, capital expenditure, and consumption metrics, they would have seen robust growth. 

“If anything, India’s growth numbers might understate the reality because manufacturing growth indicated by the Index of Industrial Production is far lower than what manufacturing companies are reporting,” it said.

Finally, the Ministry of Finance said that India’s GDP data is revised multiple times before they are finalised three years after the end of the financial year in question. 

“It is wrong to look at the underlying economic activity based on GDP indicators alone,” the post said. “Higher frequency data must be relied upon to form a view of the strength of the economic activity.”

(Edited by Uttara Ramaswamy)