Govt rejects claims of ‘mechanical’ boost to Q1 GDP growth; explains negative manufacturing deflator

The government has rejected suggestions that changes to the GDP estimates helped artificially lift India’s economic growth rate in the first quarter of FY27. It also explained the negative implicit deflator recorded for manufacturing, saying input prices rose faster than output prices during the quarter. 

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This information came out from the Ministry of Statistics and Programme Implementation (Mospi) on Wednesday in the wake of certain concerns regarding the method used to arrive at the new GDP figures. 

India's GDP growth for Q1FY27 was estimated to be 7.8 percent. According to Mospi, there had been no deliberate downward adjustment in the June quarter GDP figure of FY26 to make the recent one look better. 

A key issue under discussion has been the negative implicit price deflator for manufacturing. An implicit price deflator measures the overall change in prices used to move between nominal and real GDP figures. 

Why manufacturing recorded a negative deflator 

Mospi said the manufacturing sector is being measured using the double-deflation approach. Under this method, the prices of output and intermediate consumption are deflated separately. 

Real gross value added (GVA) is then calculated by subtracting real intermediate consumption from real output. 

In the first quarter of FY27, input prices increased faster than output prices. As a result, nominal GVA growth was lower than real GVA growth, the ministry said. 

For manufacturing, nominal GVA grew 7.7 per cent, while real GVA growth was 9.2 per cent. The difference between the two resulted in a negative implicit GVA deflator of 1.5 per cent, according to Mospi. 

Former acting chairman of the National Statistical Commission, P.C. Mohanan, said a negative GVA deflator can occur when the double-deflation method is used. He also raised questions about how the indices used for calculating the deflators are prepared. 

Corporate results offer some support 

Madan Sabnavis, chief economist at Bank of Baroda, said the explanation provided by Mospi was supported by corporate results. 

According to Sabnavis, many companies absorbed higher input costs during the first quarter rather than passing them on to consumers because demand conditions were uncertain. He said companies would eventually have to pass on the increase in input costs. 

The use of different deflators has also drawn attention because Mospi has shifted from WPI to PPI as a deflator. 

Mohanan said the ministry should have waited for the PPI series to stabilise and studied its behaviour for a reasonable period before making the change. 

Mospi rejects claim of GDP revision being used to lift growth 

There were also questions about the change in nominal GDP for the last year, which some experts pointed out has dropped from about ₹86 trillion to ₹80 trillion and may affect the growth rates of this year. 

Mospi rejected that interpretation. The ministry said revisions to the GDP series were the result of the change in the base year, improved data sources and methodologies, and updated available indicators. 

It said it was therefore incorrect to view the difference as a deliberate downward revision of the previous year's GDP aimed at mechanically increasing the current year's growth rate. 

Mospi also explained that quarterly GDP estimates follow a benchmark-indicator approach. Under this method, movements in quarterly estimates are guided by relevant high-frequency indicators. 

A change in the previous year's benchmark, the ministry said, does not by itself create an artificial increase in the current year's underlying economic activity or in the indicators used for estimation. 

Why GDP deflator differs from CPI and WPI 

These modifications in the GDP series were made owing to the changes in the base year, improved sources of data and methodology, and updated availability of indicators. 

This means that the change cannot be interpreted as an intentional downward revision of the previous year's GDP figures to increase the growth figure of the current year. 

Furthermore, Mospi highlighted that quarterly estimates of GDP are computed based on the benchmark-indicator approach. According to this methodology, movement in the quarterly GDP is determined with the help of high-frequency indicators. 

Discrepancies may change in later revisions 

Questions have also been raised over the high level of discrepancies in both current-price and constant-price GDP estimates for Q1FY27. 

Mospi said the current discrepancy could change as the GDP data goes through subsequent rounds of revision. However, it said it could not be assumed in advance that GDP would necessarily be revised upwards or by any amount. 

The ministry described the discrepancy as a statistical balancing item arising from differences between GDP estimates calculated through the production and expenditure approaches. 

It cautioned against treating the movement in this discrepancy, by itself, as evidence that the reported GDP figure is either understated or overstated. 

Mospi to publish methodology and data sources 

Mospi secretary Saurabh Garg said at a press conference that the ministry would release the methodology and data sources used in the publication Sources and Methods within the next two weeks. 

The issue comes after India changed the base year for its national accounts to 2022-23 this year from the earlier 2011-12 base. 

The Business Standard report also notes that India’s GDP methodology has faced scrutiny in the past. Finance Minister Nirmala Sitharaman had clarified in Parliament last December that the IMF’s ‘C’ rating on the adequacy of India’s national accounts data was linked to the use of the 2011-12 base year rather than a broader shortcoming in the data.