What’s the state of the Indian economy? Every Indian is interested in knowing the answer to this issue, and more and more outsiders are as well. Unfortunately, yet another misdirected dispute between the administration and its detractors has hidden this issue. The former notes that growth accelerated in the most recent two quarters, achieving the highest rate of any of the major G20 nations—6.1% in the final quarter of the previous fiscal year and 7.8% in the first quarter of FY24. The detractors assert that this growth was untrue, pointing out that a large portion of the increase in spending was attributed to a “discrepancy” as opposed to conventional categories like investment or consumption. So, is the economy growing faster or slower?
There are two main issues, both of which have received considerable attention in recent years. The first is that, in contrast to the double deflation method that is often used internationally (deflating output by output prices and inputs by input prices), the Central Statistical Office (CSO) uses single deflation, which involves reducing the nominal value added in each sector by a variety of price indices. When essential input prices such as oil vary drastically, as they have in recent years as a result of the epidemic and then Russia’s invasion of Ukraine, failing to use double deflation is extremely important.
The second problem is that some economic sectors are deflated by unsuitable indices. In particular, the nominal magnitudes for a number of non-traded services sectors that account for a significant portion of total gross value added are deflated using the wholesale pricing index (WPI) for manufacturing.
Real GDP growth was notably greater than the headline figures in FY22 and for the majority of FY23, but significantly lower in the most recent few quarters, especially since GDP inflation has actually been much more steady around the levels of CPI-based inflation. And this would imply that the economy is truly slowing down quickly. The economy still has a chance to grow rapidly and steadily. But doing so will demand diligent work to strengthen institutions and policies.