The GDP number puzzle

It may take a while to develop a gut feel for the methodology, but looking beyond GDP to the Li Keqiang approach may offer some answers

The preliminary estimates of gross domestic product (GDP)  for the first quarter (Q1FY27) beat consensus, showing 7.8 per cent growth. There has been controversy about the numbers, including a claim GDP growth was below 3 per cent.

 

This is a new series. The base-year was reset to 2022-23 from 2011-12. There are other methodological changes. Preliminary estimates for Q1FY26, released in August 2025 under the old series had estimated 7.8 per cent GDP growth. Under the new series, this has been revised down to 6.9 per cent.

 

This wasn’t the only revision. After 2022-23 (FY23) replaced the earlier FY12 base, GDP growth for FY24 was revised down from 9.2 per cent to 7.2 per cent. The FY25 growth over FY24 was increased from 6.5 per cent to 7.1 per cent. Nominal GDP for FY26 was reduced by over 3 per cent.

 

The nominal growth in Q1FY27 over Q1FY26 was 10.3 per cent. After applying the GDP deflator, real GDP growth was estimated at 7.8 per cent. The deflator is, therefore, about 2.3 per cent. That appears low. The consumer price index (CPI) ran at near or above 4 per cent through April-June 2026, and the wholesale price index (WPI) ran at above 9 per cent.

 

The baskets and weightings for the two indices are different. But raw material costs, as reflected in the WPI, rose faster than finished goods. This leads to an anomaly, given a key methodological change. India is now using a double-deflation calculation, where a final output — a mobile phone, for example — is deflated, and its components — electronics, glass — are also deflated separately. Earlier, only the final product would have been deflated.  

 

When input costs rise faster than the cost of a final good, double deflation may cause a paradox. The manufacturing sector can have a negative deflator, even if everything becomes more expensive! Incidentally, this fits with commentary from corporate managements that has made many references to “margin pressures” in Q1FY27. In effect, companies have not been able to fully pass on rising input costs.

 

In Q1FY27, manufacturing gross value added or GVA grew 7.7 per cent at current prices, and at 9.2 per cent at constant prices, odd as that seems. The manufacturing sector deflator was, therefore, about minus 1.4 per cent, masking the surge in commodity prices caused by the Iran War. Using single-deflation, the manufacturing sector would have been shrinking and reported GDP growth would have been lower.

 

Given a new series, new methodology, and paradoxes, it’s useful to apply the Li Keqiang Index. The late Chinese Premier tracked three variables strongly correlated with economic activity, in preference to GDP data.

 

One is electricity consumption. In Q1FY26, electricity consumption fell 1.5 per cent Y-o-Y. This was an extraordinary drawdown, of an order not seen since the Covid lockdowns. The low power demand was attributed to a very wet year, which reduced cooling demand.

 

In Q1FY27, electricity consumption was up 8.4 per cent Y-o-Y off that low base. Rainfall was in deficit in Q1FY27. That led to higher cooling needs, though there is no easily accessible study of how much cooling demand contributed to power consumption. But even if we make generous allowances for cooling demand, and adjust for the low base, power data supports the growth thesis.

 

Li’s second variable is freight volumes. Rail freight volumes grew 2 per cent Y-o-Y in Q1FY26, and by 1.46 per cent Y-o-Y in Q1FY27. Both numbers are lower than expected from an economy growing at speed. But port traffic grew at a rate of somewhere close to 9 per cent in Q1FY27, and that was off a high base in Q1FY26. Maybe the Railways has lost traffic share?

 

The third variable is bank credit. In Q1FY26, bank credit grew by 9.5 per cent Y-o-Y. In Q1FY27, bank credit offtake grew 20 per cent. There were changes in reporting standards. Like-for-like, bank credit expansion in Q1FY27 is closer to 18-19 per cent. That is still significant and supports the growth thesis.

 

It is counterintuitive to see a negative deflator when there’s high inflation. The inverse situation will also be counterintuitive. As and when the prices of crude, gas and other commodities fall, price indices will fall but the deflator may spike if final goods show higher inflation than the inputs. It will take a while to develop a gut-feel for the methodology. It may make sense to focus with some rigour on the Li Keqiang approach and maybe try to expand the list of high-speed variables.

 

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The writer is a New Delhi-based independent journalist