The Indian economy has been under scrutiny recently, with concerns raised about the accuracy and credibility of the nation’s gross domestic product (GDP) data. This comes in light of a reported 7.8% increase in the GDP for the first quarter of FY 2023-24. The debate has centered on the discrepancy between the positive economic growth reflected in the GDP numbers and pressing issues like rising inequalities, job scarcity, and a decline in manufacturing jobs.
GDP Calculation: A Contentious Topic
The computation of India’s GDP has raised disquieting questions for financial experts. An analysis of the GDP expenditure components suggests that most elements have decreased as a percentage of GDP. These include private consumption, government spending, valuables, and exports, while imports have seen a marginal increase. Yet, figures for Gross Fixed Capital Formation (investment in assets) and Change in Stocks (inventory changes) have remained stable. This unexplained gap in GDP calculation raises doubt about the reliability of the reported economic data.
Dual Methods, Varied Figures
India uses two distinct methodologies to calculate GDP: Economic activity (at factor cost) and Expenditure (at market prices). While the former assesses the performance of eight different industry sectors, the latter indicates how different areas of the economy are performing. The possible variations resulting from these methods may lead to inconsistencies in the GDP figures.
Perception vs Reality
Concerns have been raised that the representation of an overly positive image of economic growth through GDP numbers can undermine the real economic difficulties faced by a large portion of the population. These discrepancies have the potential to influence public perception and impact policymaking decisions.
The Issue of Outdated Data Sets
Another major concern revolves around the use of outdated data sets in the calculation of GDP, which may fail to accurately represent the current economic scenario. Delays in conducting the census also contribute to potential inaccuracies in economic assessments and concerns are voiced that the methods employed may not effectively capture the complex and evolving economic landscape, leading to potentially skewed GDP figures.
Allegations of Government Interference
There have been allegations of governmental interference. Experts worry that political motivations might influence the presentation of economic data, thereby impacting its accuracy and reliability.
Government’s Response to Concerns
The Ministry of Finance stood its ground, refuting doubts about the credibility of Indian GDP data. It clarified that Indian GDP data is not seasonally adjusted and is finalized three years later. This statement implies that relying solely on GDP indicators to assess underlying economic activity may be misleading.
The Need for a Comprehensive Analysis
The Ministry has urged critics to consider a variety of growth indicators such as Purchasing Managers’ Indices, Bank Credit Growth, and consumption patterns, for a well-rounded view of economic activity. It posited that India’s growth numbers might actually underestimate the economic reality, with the Index of Industrial Production (IIP) showing lower manufacturing growth than what companies are indicating.
Nominal vs. Real GDP Growth
Further, addressing concerns about nominal GDP growth being lower than real GDP growth, the Ministry explained that India’s GDP deflator, heavily influenced by the Wholesale Price Index (WPI), is affected by various factors and will normalize in the coming months. The Ministry emphasized that India consistently uses the Income Approach for calculating GDP growth and does not switch between approaches based on favorability.
Understanding GDP
GDP can be identified as the gross valuation of all goods and services produced within a country’s borders over a specific period, typically one financial year. It serves as an indicator of a country’s development and economic progress. As per IMF reports, India stands among the top 10 countries in the world based on its nominal GDP in 2023.
Types of GDP
There are two types of GDP: Real GDP, which is inflation-adjusted, and Nominal GDP, which is calculated using prevailing market prices without considering inflation or deflation. From the government’s perspective, Nominal GDP provides a more accurate reflection of economic growth as it directly affects the citizens.
GDP Calculation Methods
GDP may be calculated using the Expenditure Method, Output Method, and Income Method. Each approach considers different factors for calculating the GDP, whether it’s the total expenditure incurred by all entities in an economy, the market value of services and products produced within a country, or the gross income earned by various factors of production.
The Limitations of GDP
Despite its widespread use, GDP comes with its own set of limitations. It fails to include non-market transactions that impact productivity positively and doesn’t consider goods produced for private consumption. Unequal income distribution, a prevalent issue in India, is not reflected in the GDP. The standard of living, environmental impact, and social well-being are also areas not captured by the GDP.
Green GDP: A Step Towards Sustainability
To address these issues, the government has launched Green Gross Domestic Product (Green GDP), an initiative aimed at encapsulating the environment and social implications of industries.
A Final Word from The Ministry of Finance
In response to criticisms, the Ministry of Finance emphasized the importance of taking into account various economic indicators and high-frequency data for a comprehensive view of economic activity. It urged critics to refrain from selectively using data and maintain a nuanced understanding of the Indian economy.
