Copyright © HT Digital Streams Limited All rights reserved. Many economists point to 8.7% growth in nominal GDP, down from 8.8% in the April-June quarter and 10.8% in the January-March quarter. (Image: Pixabay) Summary While the GDP data issues are not new, what is new is the rating system by the IMF—launched last year—that has brought to public attention what experts have been saying for nearly a decade, India’s GDP data has always puzzled experts. Last week, the news of a ‘C’ rating by the International Monetary Fund (IMF), which highlighted shortcomings in the data, stunned the general public, which was unsure what to make of an impressive growth performance of 8.2% in the July-September quarter. While the GDP data issues are not new, what is new is the rating system by the IMF – launched last year – which has brought to public attention what experts have been saying for nearly a decade. A ‘C’ rating means India’s GDP data has “some shortcomings that somewhat hinder surveillance”. To begin with, the fundamental issue is the use of a base year from more than a decade ago, specifically 2011-12. In addition, opacity in the use of deflators to calculate growth after stripping out the effect of inflation, large mismatches in estimates between the production and expenditure approaches, and insufficient coverage of the informal sector are some other issues. This made India and China only two prominent countries in the world that have high growth records but with insufficient or suspect data. Even emerging Vietnam, which has a poor overall statistical record, scored an ‘A’ on GDP data quality. Latest Impact The issues highlighted by the IMF have long plagued GDP numbers, resulting in official growth numbers sometimes out of line with broader expectations. This also played out in the last quarter, making growth of 8.2% in the second quarter a less reliable indicator of underlying economic activity. The main identifiable culprits behind real GDP growth rising despite slowing nominal GDP were deflator issues and large discrepancies in data. First, the variance – the gap in estimates between production and expenditure – was extremely high, especially in the second quarter. Of the ₹3.7 trillion increase in GDP at constant prices from the production side, ₹1.84 trillion were discrepancies. This means that the ministry has not been able to allocate about half of the economic momentum under proper expenditure heads—consumption, investment or trade. Strip that away, and growth momentum comes down to just 4.1%. This means that either the estimates in the production approach have been overestimated or the expenditure approach has been underestimated. An overestimate is likely, as wholesale inflation, which was just 0.02% in Q2, is excessively used to deflate economic activity from current prices to inflation-adjusted prices. While WPI is primarily goods inflation, it is used for various service sector components, potentially resulting in high real growth not primarily due to low inflation but due to an inappropriate method of inflation adjustment. “The statistics office’s reliance on some wholesale measure of inflation centric to the goods side to deflate the services sector may also overstate growth,” ICICI Primary Trading said in a report. The problem arises because India has used a single deflation method, that is, a single measure to adjust prices, instead of a globally acceptable double deflation method that uses separate measures for input and output prices. This leads to misleading results, especially when input prices deviate significantly from output prices, which was the case for several sectors in Q2. The way forward… The issues highlighted by the IMF are well known, have been raised by various experts over the years, including former Chief Economic Adviser Arvind Subramanian, and acknowledged by the Ministry of Statistics and Program Implementation. The hope is that the long overdue update in the base years for GDP, inflation and industrial production will help better capture economic activity and may even lead to an upgrade in the IMF rating. The ministry plans for the new series by the end of February 2026. “I’m sure when the IMF comes back around this time next year, you’ll see better commentary on statistics,” says NR Bhanumurthy, director of Madras School of Economics. While the introduction of a new series, after a gap of 10 years, is expected to address several data issues, a few, such as the use of double deflation and producer price index (which also takes services into account), may remain unaddressed. A coin analysis of a discussion paper on the new GDP series shows a major overhaul that will take into account new and more information from the MCA-21 database, address any overestimation in company data, and use regular survey data on the informal sector as opposed to extrapolating estimates from different indicators, among other things. However, the discussion paper said it would continue to use a single deflation method for various sectors, but make statistical adjustments to minimize inconsistencies, such as moving to CPI items for deflation of some services segments. The IMF’s recommendation to use the producer price index (PPI) is unlikely to materialize as India, despite several attempts in the past, has yet to formulate the index. “We could not get the data as producers were absolutely resistant to give data on the producer prices,” said Pronab Sen, former Chief Statistician of India. Despite the long-awaited upgrade in the series, the changes may not stay good for long. The upcoming base will precede census estimates, which are also delayed by at least 15 years. Once the census is done and new demographic numbers are in, another revision in the GDP base year will capture economic momentum even better. “I expect another review in another 3-4 years once the census is over to replace population projection with actual population figures,” says PC Mohanan, former acting chairman of the National Statistical Commission (NSC). While India has largely impressed the world with its growth momentum, data issues question its track record. The country cannot afford to be in the same club as China, which is notorious for suspect or unreliable data. The upcoming review will address several questions, but the country must strive not to allow such long gaps in statistical improvements. (Payal Bhattacharya contributed to the story.) Get all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. 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