Introduction to New GDP Series
The government recently released a new series of GDP numbers to address two critical issues:
- Updating the weights of various goods and services due to significant economic changes since 2011-12.
- Addressing methodological shortcomings in GDP estimation.
Challenges with Old Methodology
The previous GDP estimation methodology faced several issues:
- Discrepancies between GDP numbers and macroeconomic indicators like exports, credit, and electricity consumption post-2015.
- Inappropriate data sources, especially using formal sector data to proxy informal sector performance, which was hit hard by demonetization, GST, and COVID-19.
- Use of inappropriate deflators, notably the wholesale price index (WPI), which understated inflation and overstated real growth.
Impact of Methodological Issues
The flawed methodology led to significant misestimations:
- Growth was overstated by about 1.5-2 percentage points between 2011-12 and 2023-24.
- The economy's actual growth was around 4-4.5% instead of the reported 6% over these years.
- From 2004-05 to 2011-12, growth was underestimated by about 1-1.5 percentage points.
This resulted in a mischaracterization of India's 20-year growth trajectory, obscuring the economic boom and subsequent slowdown.
Consequences of Misestimations
The misreading of economic data complicated macroeconomic policy and delayed necessary reforms by showing:
- An uninterrupted growth idyll of 6-7% over two decades.
- Inconsistencies such as weak private investment and declining net FDI despite strong growth figures.
These factors highlighted an overestimation of growth's strength.
India's Growth in Global Context
Despite revised estimates, India remains among the top seven or eight fastest-growing economies globally, maintaining national pride without needing statistical exaggeration.
Research and Future Implications
The research conducted complements the Ministry of Statistics and Policy Implementation's (MoSPI) efforts:
- MoSPI's new methodology aims to address identified challenges.
- The research provides a benchmark for evaluating future GDP estimation methodologies.
With these corrections, there is hope for clearer economic assessments in the future. The research is affiliated with the Madras Institute for Development Studies, JH Consulting, and the Peterson Institute for International Economics (PIIE).
