A new beginning: New GDP series has improved the scope of estimation

The data from the much-awaited new series for gross domestic product (GDP), released last week by the Ministry of Statistics and Programme Implementation (Mospi), shows that the Indian economy is projected to grow 7.6 per cent this financial year. The first advance estimate, based on the old series, had calculated the rate to be 7.4 per cent. The data also showed the economy expanded by 7.8 per cent in the September-December quarter. The new series has improved the growth estimate for FY25 to 7.1 per cent from 6.5 per cent in terms of the old series. However, the rate for FY24 has been lowered by a sharp 2 percentage points to 7.2 per cent. Further, the size of the economy in nominal terms has been calculated to be ₹345.47 trillion this financial year, compared to ₹357.13 trillion in the first advance estimate, which was also used for Budget calculations. This difference is a bit surprising. Given the improved methodology and expanded data sources, analysts expected an increase. 

Besides changing the base year to 2022-23, several elements have been introduced in the new series. For instance, the functions of multi-activity enterprises have been segregated, which will provide a clearer picture. The coverage of the unincorporated sector has been expanded through the use of survey data. The ministry has also used double deflation in agriculture and manufacturing. This addresses a big criticism of India’s national accounts. The data on goods and services tax is also being used extensively. To address the discrepancies, which were another weak point in India’s national accounts, the ministry has adopted the supply-and-use-table framework to minimise it. 

However, despite the improvement in the overall framework, arguably, there is still work to be done. For instance, economists have long argued that India needs a producer price index, which would help provide a more accurate measure of the difference between nominal and real GDP. Furthermore, while the ministry is now using survey data for the unincorporated sector, the surveys themselves may have shortcomings due to dated economic census data. Other survey data may also have similar issues because the Census has been delayed. Be that as it may, it is worth noting that the new GDP series, together with the recently released consumer price index, will substantially improve data quality and enable stakeholders to make more informed decisions.

  The launch of a new series also provides an opportunity to discuss some of the structural challenges India is facing. For instance,  in the sectoral composition, the share of manufacturing has improved marginally to 13.3 per cent. If the Indian economy is to grow at higher rates in the medium to long term and create employment for its rising workforce, the contribution of manufacturing needs to substantially increase. The government has been aiming to push the share of manufacturing to 25 per cent of GDP for many years, but things are not moving in the desired way. On the fiscal front, the reduction in the size of GDP will marginally increase the fiscal deficit as a percentage of GDP to 4.5 per cent this year. However, as economists have underscored, this will make achieving the debt-to-GDP target of 50 (+/-) 1 per cent by FY31 more difficult.