Finance Ministry defends GDP data critiques, says ‘wrong to assess economic activity on GDP alone as it is revised many times’

Finance Ministry defends credibility of Indian GDP data, citing other growth indicators, such as Purchasing Managers' Indices, bank credit growth, consumption, and government capital expenditure. It also explains why nominal GDP growth is lower than real GDP growth. India uses Income Side approach for calculating GDP growth, and does not switch between two approaches.

The Finance Ministry on September 15 scotched aspersions cast by “certain sections” on the credibility of Indian GDP data, which showed a 7.8% uptick in the first quarter of this year, stressing that Indian GDP data is not seasonally adjusted and is finalised three years later so “it is 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 long 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”.

“Indian GDP data are not seasonally adjusted, and they are also revised multiple times before they are finalised three years after the close of the relevant financial year... Many international agencies have revised up their growth forecast for FY24 (financial year 2023-24) after the first quarter data for FY24 was released. They would not have done so if the underlying economic activity was weak,” the Ministry asserted.

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 do 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 statement noted.

“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,” the statement pointed out.