Finally, an Economist Explains Why the Indian GDP Growth Number Is Wrong

Mar 18, 2016

In this issue:
» Is Start Up India in Trouble?
» A Mega Telecom War is on the Cards!
» ...and more!
Rahul Shah, Co-Head of Research

Dear Readers:

India's GDP data is a hot topic of debate. In an edition of The 5 Minute WrapUp, we questioned India's GDP numbers.

However, no one has simplified this debate for the aam investor... until now.

Considering the significant implications economic data will have on various aspects of policy and thus the country's citizens, for today's edition of the 5 Minute WrapUp we invited Vivek Kaul to share his much sought-after views on the subject.

Many of you know Vivek as the India Editor of Vivek Kaul's Diary. He is also the author of a trilogy on the history of money and the financial crisis titled Easy Money.

Happy reading! - Rahul Shah


Vivek Kaul

I was just joking to a friend the other day that if economists started writing their stuff in simple English, which everybody can understand, guys like me who make a living out of translating what economists think and write, into simple English, would be driven out of the business very quickly.

The question is why do economists write the way they do? As John Lanchester writes in How to Speak Money: "As your vocabulary becomes more specific, more useful, more effective, it also becomes more exclusive. You are talking to a smaller audience...There are a lot of things like that in the world of money, where the explanation is hard to hold on to because it compresses a whole sequence of explanations into a phrase, or even just into a single word." This is precisely what happens when economists write, or talk for that matter.

Nevertheless, given the chances of economists writing in simple English are low, I guess I am likely to continue to be in business.

Moving forward, in this piece I wanted to look at a column which was recently published in the Mint newspaper. The column is titled Real GDP is growing at 5%, not 7.1% and has been written by economist Rajeswari Sengupta.

I think the column makes a very important point. Nevertheless, my only quibble with it is that it has not been written in simple English. An idea as important as this column communicates needs to reach a wider audience and not just other economists.

So what is the core idea of the Mint column? As Sengupta writes: "Are our gross domestic product (GDP) numbers credible? Many commentators have expressed their doubts. But no one has yet identified problems with the Central Statistical Organisation's (CSO) methodology. This is because they have been looking in the wrong place."

Sengupta essentially goes on to explain what is wrong with the Indian GDP growth numbers.

In January 2015, the CSO moved to a new way of calculating the GDP. The GDP is a measure of all goods and services produced within a country. It is a measure of the economic size of any country. And GDP growth is essentially a measure of economic growth.

After the CSO last January unveiled the new way of calculating the GDP, the Indian GDP numbers suddenly started to look better. The GDP growth as per the old method had stood at around 5%. With the new method, the GDP growth suddenly crossed 7%.

The CSO estimates that in 2015-2016 (the current financial year) the Indian economy is likely to grow at the rate of 7.6%. It is important to understand that the GDP is a theoretical construct. There are many high frequency economic data indicators which tell us very clearly that there is no way that the country is growing at the rate at which the CSO wants us to believe it is.

Exports are down. Two wheeler sales growth has been fairly insipid. Railway freight growth has been very slow. Bad loans of banks are rising at a fairly rapid rate and their lending growth has been very slow. Corporate earnings growth has been terrible.

Given these reasons, how can the GDP possibly grow at 7.6% during this financial year, is a question worth asking.

Sengupta in her column explains what is wrong with the GDP growth number of 7.6%. As she writes: "The problem is not, as many have suspected, in the nominal numbers. It lies in the system for constructing the deflators. This methodology is flawed, yielding exaggerated estimates of the speed at which the economy is growing."

Let me explain this mumbo jumbo in simple English. The GDP growth number of 7.6% is essentially what economists call the real GDP growth. The real GDP growth is essentially GDP growth which has been adjusted for inflation. The nominal GDP is the GDP growth which hasn't been adjusted for inflation.

Hence, real GDP growth is essentially nominal GDP growth minus the prevailing rate of inflation. So far so good.

Now Sengupta talks about something known as a deflator in her column. What is a deflator? Lanchester defines a deflator in his book as "the number you use when working out the value of money minus the effect of inflation."

In Sengupta's case, she is talking about what economists refer to as the GDP deflator, which is nothing but the rate of inflation used to come up with the real GDP growth number from the nominal GDP growth number.

The real GDP growth number is essentially the nominal GDP growth number minus the GDP deflator. Let's understand this through an example. Let's say the nominal GDP growth is 10%. The GDP deflator is at 3%. Then the real GDP growth is 7% (10% minus 3%). If the GDP deflator is 1%, then the real GDP growth is 9% (10% minus 1%). That is how it works.

What is the problem with the GDP growth number? As Sengupta puts it: "The real numbers are derived by taking nominal data on the economy and deflating them by price indices. So, if inflation is understated, then real growth is going to be overstated. And this is what has been happening."

Hence, the CSO seems to be using a lower GDP deflator to arrive at the real GDP growth number. This has led to a higher real GDP growth number, which seems unreal.

And this is precisely where the problem lies. If we look at the nominal growth number for the period October to December 2015, it stands at 7.9%. A deflator of 0.7% meant that the real growth came in at 7.1%. (The number should be 7.2% if we follow what I explained earlier, but there must be some rounding off errors here).

Sengupta's contention is that the CSO is understating the GDP deflator at 0.7% and the number should be higher than this. As she writes: "Could India's inflation be so low? In effect, the CSO is saying that despite India's booming economy, producer inflation is lower than that of the recession-wracked economies of the West, or even that of Japan, which has been wrestling with deflation since the 1990s." This underestimation is happening primarily because the calculation of the GDP deflator closely tracks the inflation as measured by the wholesale price index, which has been in negative territory for some time now (16 months to be precise).

This explains why CSO feels that the Indian economic growth in 2015-2016 will be at 7.6%, even though the high speed economic indicators indicate otherwise. Sengupta shows that by using the right GDP deflator, the real GDP growth cannot be possibly more than 5%. And that is precisely the point I have been making over the last few months.

Do you believe India's GDP numbers? Let us know your comments or share your views in the Equitymaster Club.

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2.40 Chart of the Day

We can't help but agree with Vivek. Picking up from where he left, we would like to highlight another worrying sign for the economy. The government's Start Up India campaign has put the emphasis on job creation on startups. And startups are certainly a hot topic these days.

The amount of funds they have attracted over the last few years is mind-boggling. Today's chart shows that a slowdown is underway in the startup sector. In terms of both, the number of deals as well as the deal sizes, seed capital flowing in to India's startups (known as series A funding), is clearly slowing down.

Are Startups Running Out of Steam

This does not surprise us. We have been warning for a long time that the valuations given to startups are unsustainable. As P-E firms started competing with venture capitalists (VCs), valuations had reached insane levels. Now with seed funding slowing down, the inevitable correction in the late stage final valuation is also bound to fall in our view.


Yesterday's big corporate news was from the telecom space. As expected, the consolidation that was inevitable, is now happening. Bharti Airtel will pay Rs 44.28 bn for Videocon Telecom's spectrum in six circles. This after Videocon and Idea Cellular called of their talks. When we consider this development with Reliance Communication's proposed buyout of Sistema, it is clear to us that the sector is gearing up for a big battle.

With Reliance Jio all set to enter in a big way in the second half of the year, the incumbents are strengthening their positions. RCom is reportedly in talks with Aircel. It has already tied up with RJio to share resources. Idea is scaling up its 4G presence aggressively and Vodafone will do so soon.

Does this mean lower prices for consumers? Not necessarily. It will all depend on how aggressively RJio prices its service. But one thing is clear. As we had stated in our recent research note (subscription required) investors should brace themselves for a bumpy ride!


Indians markets were trading positively today. The BSE Sensex was trading higher by 0.4% or 101 points at the time of writing. Strength was seen across the board with banking and consumer durables, and IT stocks leading the pack of gainers. The mid cap and small cap indices were trading flat.

4:50 Today's investing Mantra

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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4 Responses to "Finally, an Economist Explains Why the Indian GDP Growth Number Is Wrong"


Mar 21, 2016

its a wonderful research to understand GDP but it has not covered that how many things are counted as gross. Are there any fundamental Qns unanswered by the economists. We are largest young population in the world. All of us have seen STD booth era. Now we are wintenssing Internet revolution.

How Govt can come to conclusion when 20% items in Mumbai are sold unbilled. Like If we Go to Alfa Mkt, Veg mkt Flower mkt or Grafird Mkt. GDP should count those business or not?


R K Sharma

Mar 19, 2016

I think all these numbers are hog wash
The real growth is the one that exists on the street and what the citizen feels.
If there is real growth there should be more jobs, more earning power, more disposable income, and stronger demand.Flashback to 2004/2008 period.
None of this exists.Credit expansion, transport expansion, consumption of electricity, taxes paid by corporates, etc are better indicators and leading too.


Patanjali Dhar

Mar 18, 2016

Why u r taking opinion of economist from J N U? The views of economists from J N U are flawed. They want to support China and say thet China is doing better than India. Let them say so. But you should not be carried away by the arguements of JNUites. Listen to Rajan, Meghnad Desai etc

Like (1)

C K Vaidya

Mar 18, 2016

Let us assume that CSO is using a wrong deflator. Are IMF, World Bank and a host of other International Agencies using the same deflator?
There has to be some other explanation. My guess would be that sectors which do not normally attract attention may be growing faster. While you have commented on exports shrinking, this degrowth is in absolute number, I.e. Before applying deflator. Given high weightage of Petroleum and Gold/jewellary in exports, the deflator for this portion of exports must be a huge negative number. I wonder why nobody has come up with deflated Export numbers.

Like (1)
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