Here's why UPA-era GDP growth was pulled down in the new calculation

CSO has increased the GDP deflator by nearly 90 basis points in the series, thus bringing down growth at constant prices

A significant part of the downward revision in India's headline economic growth between 2004-05 and 2013-14 can be attributed to the upward revision in the gross domestic product (GDP) deflator (underlying inflation), as economic growth at current prices remains broadly similar at about 15 per cent in both the series.

According to the Central Statistics Office's (CSO's) revised estimates, based on the 2011-12 series, the economy was growing at 15 per cent at current or nominal prices during the 2005-14 period against earlier estimates (2004-05 series) of 14.9 per cent. 

This, however, does not translate into faster growth than estimated at constant prices, as the GDP deflator has been revised upwards to 8.4 per cent from 7.5 per cent earlier (See chart).

Economists are not convinced about the revised data. “We are concerned with the growth trajectory — when it picked pace and it faltered. The growth trajectory (for 2005-14 period) is broadly the same in both the GDP series, thus projecting similar levels of economic activity," said an economist who tracks the domestic economy.

The upward revision in the deflator, however, means that the CSO believes the underlying inflation or price increase was greater during the 2005-14 period than the earlier estimates. 

The headline economic growth is derived by subtracting the deflator from the GDP growth at current or nominal price.

Adjusted for the new GDP deflator, India's economic growth during 2005-14 declined to 6.7 per cent, compared to earlier estimates of 7.5 per cent. This turned out to be lower than headline economic growth of 7.3 per cent in the past four years (2014-18).

The relative growth numbers change completely if economic growth at current or nominal prices is adjusted or deflated by the underlying retail inflation or consumer price index (CPI)-based inflation in the corresponding period. 

Adjusted for retail inflation, GDP growth at constant prices declined to 6.5 per cent during 2005-14, but was higher than the corresponding growth rate of 5.8 per cent during 2014-2018.

This is because of a 450 basis points decline in growth at current or nominal prices to an average of 10.5 per cent, lowest in at least two decades. (See chart).

According to the CSO, the economic growth rate picked pace in the past four years because of a sharp decline in the GDP deflator or underlying inflation in the economy. It estimates the deflator to be around 3.2 per cent per annum in the past four years, less than half of the previous decade and the lowest in nearly two decades. 

In the revised series, the GDP deflator (in 2005-14) is now closer to the consumer price index during the period. The CPI or retail inflation during the period was 8.6 per cent, only 20 basis points higher than the estimated GDP deflator. 

In contrast, the GDP deflator for 2014-18 at 3.2 per cent per annum remains lower than the retail inflation of 4.7 per cent.

Historically, the GDP deflator has always been lower than the underlying CPI during the corresponding period. Experts attribute the gap between deflator and consumer inflation to the way the two variables are measured. 

“The GDP deflator gives higher weightage (up to 70 per cent) to changes in wholesale prices; retail prices only play a minor role here,” said Dhananjay Sinha, head of research at Emkay Global Research. 

While the GDP deflator is calculated by the CSO, the data on retail inflation is provided by the labour department.