The flaw in the numbers
The primary yardstick analysts use to measure the economy’s health is GDP. The RBI and multilateral agencies use GDP statistics to make claims about the future growth path.
But how reliable is the Indian GDP data?
- NSO calculates real GDP by gathering nominal GDP data in rupees and then deflating this data using various price indices. The nominal data needs to be deflated twice: Once for outputs and once for inputs. But the NSO deflates the nominal data only once. It does not deflate the value of inputs.
- EG: when the price of imported oil goes down, the input costs will fall and the profits recorded by Indian firms will rise. This increase in profits is merely the result of a fall in input prices, so it needs to be deflated away. But the NSO doesn’t deflate away the increase in profits. Instead, it records a purely nominal increase as a real increase in GDP, thereby overstating growth.
- NSO has not updated the sectoral weights. To make sure that the weights are reasonably accurate, the NSO normally updates them once a decade. It has now been more than 10 years since the weights were changed. Eg: the fast-growing IT sector is being underweighted, which implies that GDP growth is being underestimated.
- Once in a while, the NSO undertakes a survey to measure the size of the unorganised sector. In the meantime, it simply assumes that the sector has been growing at the same rate as the organised sector. However, starting in 2016 the unorganised sector has been disproportionately impacted by a series of shocks:
- Pandemic etc.
- Despite these shocks, the NSO does not seem to have made any adjustments to its methodology for estimating the growth of the unorganised sector.
- There are certain problems with India’s GDP data. Any analysis of recovery or growth forecast based on this data must be taken with a handful of salt.