The IMF gave a grade C to the way India’s GDP is calculated. While the report titled ‘2025 Article IV consultation‘ is 116 pages long, the annex VII made all the headlines where National accounts is graded ‘C’ citing data Issues, namely (i) an outdated base year (2011/12), (ii) use of wholesale price indices as data sources for deflators due to the lack of producer prices indices, and excessive use of single deflation, which may introduce cyclical biases, (iii) at times sizable discrepancies between production and expenditure approaches, that may indicate the need to enhance the coverage of the expenditure approach data and the informal sector, and (iv) lack of seasonally adjusted data and room for improvement of other statistical techniques used in the quarterly national accounts compilation.
This has been long pointed by experts. I find the following series of interviews in The Wire‘s YT channel with Pronob Sen, India’s former Chief Statistician especially enlightening on the way India’s GDP issues is calculated and all it’s issues (there are also a few which talk about how the economic indicators and what it tells about the state of economy). They are ordered by the date of the interview with the last ones being the first and I have pointed out the key issues discussed with relevant links below the embedded playlist.
GDP calculation accuracy
- The reliance on the production approach for GDP calculation versus income and expenditure approaches due to to poor data availability leads to large data discrepancies.
- The Wholesale Price Index (WPI) is a flawed price deflator as it fluctuates widely, is not the ideal Producer’s Price Index (PPI). Its use can lead to the overestimation of GDP growth.
- The output of the unorganized sector, which accounts for 45% of GDP and 80-85% of employment is calculated using a proxy derived from the performance of the organized/corporate sector is a major issue due to the disparity in performance between the two sectors. Since the informal sector was badly hit by demonetisation and GST, using the relatively better-performing formal sector data to project its growth is likely inaccurate.
- Incidentally one of his arguments is that that the underlying methodology for GDP is good, but the data itself is seriously flawed. This is what is counter to the IMF report.
Headline vs Details
- Just looking at the headline GDP as an economic activity indicator isn’t correct as issues within can be divergent – for e.g., investments, private consumption, exports, manufacturing and agricultural growth can all be going in opposite directions.
- Even within sub-indicators the growth might no accurately reflect economic activity. For e.g., in Q2 FY21 GDP, the manufacturing sector grew 0.6% but this growth is due to companies using up stocked-up raw materials (not buying new inputs) and boosting profits by cutting salaries and laying off employees. This increases corporate profits without reflecting a genuine increase in production or sales.
- Periodic Labour Force Survey (employment data) and the consumption survey data, make for a better understanding of the economy. Given they’ve not been release or suppressed, it makes understanding economic reality impossible.
GDP as a flawed measure of welfare
- GDP only measures the “sum total of the income generated in the country” — the size of the “cake” — but says nothing about how the income is distributed.
- It cannot be used a metric for national economic welfare because it hides critical issues like inequalities, acute job scarcity, and poor social indicators.
