Wrong to assess economic activity on GDP alone: FinMin

September 16, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

Wrong to assess economic activity on GDP alone: FinMin

Subject: Economy

Section: National Income

In News: Finance ministry defends economic performance of India with quarterly growth at 7.8%, emphasizing some limitations of GDP calculation.

Key Points:

Finance Ministry defends GDP performance after questions were raised on credibility of the quarterly growth of 7.8%.
According to Finance Ministry it is wrong to look at the underlying economic activity based on GDP indicators alone look at several other growth indicators to see if other data match their conclusions.

The main points raised were:

Indian GDP data is not seasonally adjusted and they are also revised multiple times before they are finalised three years after the close of the relevant financial year
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.
MoSPI calculates quarterly Gross value added (GVA) in real terms first, and then, using the deflator, nominal values are obtained.
Because of this nominal growth rates have slowed, with WPI contracting in recent months.
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.
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”.
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.
GDP is calculated 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 in FY23 and FY22, the ‘statistical discrepancy’ was negative. In other words, growth as per the Income Approach was lower.

Statistical discrepancy

Statistical discrepancy refers to the difference between two theoretically equal aggregates arising as a result of basic statistics and estimation techniques.
National accounting of macroeconomic aggregates, such as gross domestic product can often be calculated in two or more ways, notably income and expenditure approach.
In principle, all the measures of an aggregate are equal. In practice, differences invariably arise due to imperfections in basic statistics and estimation techniques. This difference is called a statistical discrepancy and serves as the balancing item between two theoretically equal aggregates

Seasonal Adjustment

Economic variables are influenced by systematic and recurrent within-a-year patterns due to weather and social factors, commonly referred to as the seasonal pattern (or seasonality).
When seasonal variations dominate period-to-period changes in the original series (or seasonally unadjusted series), it is difficult to identify nonseasonal effects, such as long-term movements, cyclical variations, or irregular factors, which carry the most important economic signals.
Seasonal adjustment is a statistical technique that attempts to measure and remove the influences of predictable seasonal patterns to reveal how employment and unemployment change from month to month.