Can India's Growth Projection Hold Weight With GDP Deflators?

The Central Statistics Office’s (CSO’s) second advance estimate pegs India's gross domestic product (GDP) growth rate at a robust 9.1% in current prices, or nominal GDP, for the fiscal year 2023-24. The projection has been hailed as reaffirming India's position as the fastest-growing large economy globally. The number also brings into focus the role of GDP deflators in measuring overall inflation in any economy. They adjust the size of the economy's value without the influence of price changes.

A look at CSO’s growth projection at constant prices reflects the role of GDP deflators in measuring economy-wide inflation. The growth rate at constant prices, or real GDP, is projected to be 7.6% for the fiscal year 2023-24. To compute the growth rate in current prices, the GDP of 2023-24 is compared to the GDP of 2022-23, both measured in prices prevailing in the respective years. The figure measured in constant rupees is called real GDP and the one measured in current prices is called nominal GDP.

Understanding Inflation

What we see and report directly is production at current prices, such as the financial reports companies submit to the corporate affairs ministry. First, nominal GDP figures are compiled gathering data from various sources. Then, it's divided by a figure representing overall price increases, known as the GDP deflator, to derive the real GDP in constant rupees. The difference between the real and nominal growth rates closely mirrors the economy-wide inflation rate. For example, if inflation is 5%, the GDP deflator would be 1.05.

The reported economywide inflation figure of 1.5% may seem modest, but in the lived experience of consumers, especially concerning essential commodities like food and fuel, the pinch of inflation has been much sharper. However, there are valid reasons for economy-wide price changes to be different from what consumers expect them to be. 

What consumers register vividly are the prices of food, cooking fuel, electricity, petrol and diesel, and rents. But the economy has way more goods and services, whose effect on the consumer is indirect, and so is not registered sharply. The discrepancy between reported inflation and consumer perception also underscores the complexity of economic measurement and analysis. 

Evolving Consumer Choices

Further examination reveals significant shifts in consumption patterns over the years. After the results of the Monthly Per Capita Consumption Expenditure (MPCE) were published in February this year, many economists immediately argued for bringing down the weightage of food in the index. MPCE figures showed that the share of food in monthly per capita expenditure has been coming down over the years. 

 

Source: MoSPI MPCE Factsheet

This trend reflects evolving consumer preferences and economic dynamics shaping India's consumption landscape. Cereal consumption has been coming down not only for the ones being advised to cut down on carbohydrates after a treadmill test during the annual health check-up but for the entire population, thanks to mechanisation of farming and transport. The share of cereals in overall consumption has come down more sharply, with the expansion of the consumption basket to include more varied foods and non-food entities such as telecom, entertainment, education, and healthcare.

The calculation of inflation is reliant on various price indices. The wholesale price index (WPI)  is a little dated, with its base year in 2011-12, and is restricted to commodities and excludes services. WPI in November 2022 stood at 153.1 and at 151.8 in March 2024. As per this index, prices for all commodities have declined, compared to late 2022. In the other index, the consumer price index (CPI), food prices play an important role in determining inflation. Economists have often argued for adjustments to these indices to accurately capture changes in consumer behavior and product quality improvements. Such adjustments could impact reported inflation rates and subsequently alter the real GDP growth rate.

Need For Updation

In 2001, the share of food and beverages in the CPI was 46.2%. In the latest index, which maintains a consumption basket from 2012 as the base year, this share has slightly decreased to 45.86%. Given the MPCE data on the share of food shares in overall consumption in rural and urban areas, and assuming the urban population to be 35% of the total today, the weighted average share of food in overall consumption would be 43.86%. Lowering the share of food, the most volatile segment of the price index would bring down overall CPI-based inflation. 

Statisticians can also use other techniques to bring down the rate of inflation. Take the method suggested by Britain’s Office for National Statistics. It describes how to use the price deflator to account for improvements in quality. For instance, if a printer cartridge now carries double the ink it used to in the past, each new cartridge can count as two, to register price changes. 

However, some things call for more radical approaches. A mobile phone today is a bundle of a vast array of services, which had to be individually procured in the pre-smartphone and early smartphone periods. It is possible to impute the value of this entire bundle of services backward to construct the evolution of the price of the phone. The result would be a significant fall in price.

We do not know how precisely the CSO has arrived at the economywide inflation figure of 1.5%, to derive a real growth rate of 7.6% from a nominal growth rate of 9.1%. While there are valid justifications for economy-wide inflation to diverge from CPI inflation, which influences the central bank's interest rate decisions, a disparity of 4-5 percentage points seems substantial. The reported figures, subject to revision before finalisation, highlight the need for a nuanced understanding of economic data and its implications.