Wrong to assess economic activity on GDP alone: FinMin

Govt. calls out critics for ignoring high-frequency data like Purchasing Managers’ Indices; says IIP numbers understate manufacturing growth

The Finance Ministry on Friday challenged aspersions cast by “certain sections” on the credibility of India’s GDP data, which showed a 7.8% uptick in the first quarter, stressing that the GDP data was not seasonally adjusted and was finalised three years later, and it was therefore “wrong to look at the underlying economic activity based on GDP indicators alone”.

“Ideally, critics would have done well to look at several other growth indicators to see if other data match their conclusions. Purchasing Managers’ Indices indicate that the manufacturing and services sectors are growing. Bank credit growth is in double digits. Consumption is improving, and the government has vigorously ramped up capital expenditure,” the ministry said in a post on social media platform X, formerly known as Twitter.

“Higher frequency data must be relied upon to form a view of the strength of the economic activity,” the ministry said, adding that “if anything, India’s growth numbers might understate the reality because manufacturing growth indicated by the Index of Industrial Production (IIP) is far lower than what manufacturing companies are reporting”.

‘New bogey’

The ministry also called out references to nominal GDP growth being lower than real GDP growth as “a new bogey being spread to discredit the GDP numbers and indicate that underlying economic activity is quite weak” and said both arguments did not stand up to scrutiny.

“India’s GDP deflator is dominated by the Wholesale Price Index (WPI) [which] peaked in the first quarter of 2022-23 due to the oil and food price increases in the wake of the war in Ukraine and supply-side disruptions. Prices began to come down from August 2022 onwards. Hence, WPI is now contracting year-on-year. It will soon pass once the statistical base effect disappears,” the ministry said.

“If inflation were higher, critics would argue that nominal GDP growth is much higher because of inflation and that there was little underlying activity. MoSPI calculates quarterly GVA in real terms first, and then, using the deflator, nominal values are obtained. No wonder nominal growth rates have slowed, with WPI contracting in recent months. This will normalise in the coming months,” it asserted.

“India’s real GDP growth was 7.8% year-on-year in the first quarter of 2023-24. This is as per the Income or Production Approach. As per the expenditure approach, it would have been lower. So, a balancing figure — statistical discrepancy — is added to the expenditure approach estimate. These discrepancies are both positive and negative. Over time, they wash out,” the Finance Ministry contended.