News Analysis

What’s puzzling in the newly released GDP data

Radhika Merwin BL Research Bureau | Updated on January 12, 2018 Published on June 01, 2017

Gross value added not in sync with revised IIP growth numbers

The latest set of GDP releases put out by the Central Statistics Office (CSO), that marks down the earlier March quarter growth estimates considerably, rightly takes into account the impact of demonetisation.

The fourth quarter real GDP growth number for 2016-17, is now pegged at 6.1 per cent, far lower than the 7 per cent estimated in February. While this may be so, the latest release still carries some puzzling trends.

For one, despite the significant lowering of growth estimates for the fourth quarter of 2016-17, the full year real GDP growth forecast has remained unchanged at 7.1 per cent.

A significant bump up in the first quarter estimates is the key reason behind this. From 7.2 per cent growth earlier, the CSO has upped the first quarter real GDP growth estimate to 7.9 per cent.

This upward revision has been led by manufacturing, electricity, construction, and financial, real estate etc. While the jump in growth estimates for the first quarter, directionally mirrors the revision in the new IIP (re-based from 2004-05 to 2011-12), the magnitude of revision raises some questions.

Also, it is unclear why the revisions in IIP only reflect in the first quarter numbers, when, going by the new IIP data, the full year FY16 and FY17 GVA (gross value added) — a better indicator of economic activity from the producers point of view — were due for a revision.

Growth in the new IIP for FY16 and FY17 stood at 3.4 per cent and 5 per cent respectively, against 2.4 per cent and 0.7 per cent respectively under the old IIP series. GVA for FY17 has in fact been revised down by 10 basis points to 6.6 per cent in the latest data release.

Deflator doesn’t add up

The other weak link in the latest GDP data, is the sharp increase in GDP deflator for the fourth quarter of FY17. The growth in GDP deflator (ratio of nominal to real GDP) — another measure of inflation — works out to nearly 6 per cent, a sharp rise from around 5.4 pegged earlier.

This is at odds with the underlying CPI and WPI (new) inflation trends. A back of the envelope calculation of deflator using CPI and WPI by assigning each equal weightage suggest a 4.2-odd per cent deflator for Q4 of FY17.

Importantly, within sectors, the GVA deflator for Q4 has undergone substantial revisions. For mining and quarrying for instance, the Q4 deflator is a high 25 per cent according to the CSO’s latest release, after a negative 16.2 per cent and 7.9 per cent in the first and second quarter. Such wide variations are also seen within construction, trade and electricity.

In effect because of the sharp revision in Q4 deflator, the growth in nominal GVA is a much higher 11.3 per cent against a 5.6 growth in real GVA.

Sharp revisions

Given that growth estimates by the CSO undergo sharp revisions later on, growth numbers for now need to be taken with a pinch of salt. Remember, the CSO came out with a new set of growth estimates for 2015-16 (a year’s lag) in February this year, which differed significantly from the earlier estimates.

CSO had bumped up the growth in real GDP from 7.6 per cent to 7.9 per cent for the FY16 fiscal. This growth for FY16 has now been revised to 8 per cent.

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