Ministry of Statistics and Programme Implementation

The ministry of statistics and programme implementation released a new set of gross domestic product(GDP) numbers for this financial year on February 9, 2015. A new method has been used to calculate the GDP and as per this method, the GDP growth in the current financial year (2014-2015) will come in at 7.4%. This is significantly higher than the 5.5% growth that had been forecast by RBI earlier.
It needs to be stated upfront that revising the method of calculating GDP is par for the course as government gets access to better information and at the same time needs to take into account the changing structure of the economy.
This revision of the GDP number and in the process GDP growth has got everybody excited. Nevertheless, the new GDP number needs to be looked at very carefully. Take a look at the following table which has the nominal GDP as per the new method compared with the nominal GDP as per the old method.

Source: Press information bureau and budget documents

The nominal GDP is calculated using current prices in a given year and hence, is not adjusted for inflation. As per the old method, the nominal GDP has jumped by 43.1% between 2011-2012 and 2014-2015. As per the new method, the nominal GDP has jumped by 43.3% between 2011-2012 and 2014-2015. Hence, as far as growth in nominal GDP is concerned, it is more or less the same over the last four years, using both the methods.
Let’s get a little more specific now and look at the jump in nominal GDP between 2013-2014 and 2014-2015. As per the old method the nominal GDP was expected to go up by 13.6%. As per the new method, the nominal GDP is expected to go up by 11.5%. This is slower than the growth expected through the old method. In absolute terms the difference in nominal GDP between the old method and the new method is more than Rs 3 lakh crore.
Nevertheless, the growth in real GDP in the current financial year is expected to come in at 7.4% as per the new method. As mentioned earlier RBI had forecast that the real GDP growth in the current financial year would be at 5.5%. Real GDP growth essentially takes inflation into account.
So, what explains this disconnect? The nominal GDP growth is faster as per the old method but the real GDP growth is faster as per the new method. The explanation may very well lie in what sort of GDP deflator was used to convert nominal GDP numbers into real GDP.
Investopedia.com defines the GDP deflator as: “An economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP.” Deutsche Bank economists Taimur Baig and Kaushik Das write in a research note that: “The…nominal [GDP] growth of (11.5% year on year) and real GDP growth (7.4% year on year) estimates for FY14/15[financial year 2014-2015] imply that the GDP deflator is likely to be 4.1% for the current fiscal year.”
This is where things get interesting. Inflation as measured by the consumer price index has been falling this year, but it still hasn’t fallen to a level of 4.1%. For the month of December 2014 (the latest number available) it stood at 5%. The average inflation for the period April to December 2014 was at 6.8% (a simple average of monthly inflation numbers). As Crisil Research points out in a research note: “The new GDP series accounts for much lower inflation than recorded by CPI-2010 base[the method currently used to calculated inflation based on the consumer price index].”
So, the question is if the inflation has been at 6.8% for the first nine months of the financial year, how can the GDP deflator be at 4.1%? (It needs to be mentioned here that inflation as measured by the GDP deflator can be different from the inflation as measured by the consumer price index given that the coverage and weights of different items differ.) But the difference between that the two numbers is fairly significant.
If we consider the deflator to be at 6.8% then the real GDP growth for this year falls to 4.7% (11.5% minus 6.8%). This number is much more closer to the 5.5% real economic growth that has been forecast by RBI. It is also in line with a lot of high frequency data that has been coming out.
In fact, for the period October to December 2014, things get even more interesting. The nominal GDP growth during this period as per the new method was at 9%. The real GDP growth was at 7.5%. This implies a deflator of 1.5%. The inflation measured by the consumer price index, during this period was around 5%. Hence, how did the deflator turn out to be 1.5%?
Given this, there are too many points in the new way of calcuating GDP that do not make sense. As Baig and Das point out: “Overall, we are unsure about how to reconcile this new data with indicators that show companies struggling with earnings and investment, banks seeing rising bad loans, credit growth slowing, and exporters reporting negative growth.” Other than this car sales have been muted, tax collections have been slow and the total number of stalled projects continues to be huge. Businesses also remained cautious about making fresh investments. As Crisil Research points out: “India Inc remained cautious on fresh investments. While there was some pick-up in investments from -0.3% in fiscal 2013 to 3% in fiscal 2014, a large part of the rise in consumer demand was also met by utilising existing inventory.”
Numbers highlighted in the last paragraph(from slow growth in bank lending to companies struggling with earnings) are real numbers unlike the GDP which is a theoretical construct. And these numbers do not reflect in any way a GDP growth of 7.4%, given the inflation level of 6.8% during the course of this financial year.
So what possibly explains this jump in growth? A possible explanation, as highlighted earlier, is that the inflation that has been considered to arrive at real GDP numbers is much lower than the prevailing inflation as measured by the consumer price index.
Further, on February 12, the ministry of statistics and programme implementation is going to release a new method of calculating inflation based on the consumer price index. If the new inflation number turns out to be considerably lower than the numbers that have been released during the course of this year, then we will have a possible explanation for this jump in GDP growth. If it does not we will have to look somewhere else.
To conclude it is worth remembering what the American professor Aaron Levenstein once said: “Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.” (And no Navjot Singh Sidhu did not say this).

(The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning as on Feb 11, 2015)