Concerns on GDP Estimates: IMF and Beyond
Sanjay Roy
THE second quarter (Q2-July-September) estimates of GDP released by the government on November 28 estimate real GDP growth of 8.2 per cent and nominal growth of 8.7 per cent with an implicit inflation rate of 0.5 per cent. This estimated growth is higher than 5.6 per cent for Q2 of 2024-25 but lower than the Q2 figure of 2022-23, 9.3 per cent. The government claims that due to GST reforms, good harvest and low food inflation the headline inflation rate is low. Interestingly, the IMF staff reports released in November raise concerns about the quality of data while expressing confidence in India’s robust growth despite external headwinds. IMF raises concern about the quality of data and grades India’s national accounts data in the ‘C’ category implying ‘data provided to the fund have some shortcomings that somewhat hamper surveillance’. Certification of IMF in view of making data amenable to their surveillance is not the test India should necessarily comply with. However, issues of coverage, revision of the base year, widening gap between income and expenditure-based estimates of GDP, lack of producer price indices are important concerns raised about the quality of data.
Due to moderate inflation rate, the nominal GDP growth rate may fall short of the projected annual growth but the government asserts that the real GDP growth rate of FY 2025-26 will turn out to be close to the projected figure of 6.3-6.8 per cent. The World Economic Outlook in its June projection estimated India’s real GDP growth to be 6.4 per cent for both 2025-26 and 2026-27. The latest revised estimate projects 6.6 growth for 2025-26 while lowering down the estimate for the year 2026-27 to 6.2 per cent. IMF’s concerns relating to coverage of national accounts including direct figures for the informal sector, price data and government’s fiscal and monetary statistics might be pertinent, but the deeper question relates to inconsistency of growth figures with reality and economic logic.
IMF’s Concerns
The IMF staff report while expressing concerns about data quality strongly endorses India’s reforms and suggests speeding up the remaining ones in the short and medium term. The IMF further points out that in the short run, on account of GST reforms, revenue may fall short of expected targets and therefore calls for strong spending discipline. In the name of efficiency of expenditure and more targeted safety nets, the underlying message therefore is to cut down expenditure to stick to the fiscal deficit target. The IMF also highlights that with increased tariff and heightened uncertainty in bilateral trade policy with the US there might be an adverse impact on domestic investment as well as on FDI inflows. In the current scenario, even if gross FDI inflows to India rose, net FDI inflows are zero. Also increased uncertainty and fragmentation in global trade may give rise to supply constraints. The policy suggestions of the IMF staff report are nothing but reaffirming the recipe of neoliberal reforms. The IMF suggests speedy implementation of labour codes to ensure ‘labour market flexibility’, reducing trade restrictions to facilitate imports, reforms in the agricultural sector including land management and judicial reforms. The report also suggests facilitating education, skill development and access to credit. Handing over public assets to private hands for profitable investment has been identified as the engine of reform. Undoubtedly, the government is following the charted neoliberal path that favour corporates and weakens institutions that protect rights of labour, while converting public wealth into private assets and commercialising health and education services.
But the IMF report is critical about the quality of data on account of continuing with the base year 2011-12 as it is now more than a decade and the composition of the consumption basket has undergone significant change during this long gap. It also expresses concern about using the wholesale price index (WPI) as deflator instead of using producer prices and excessive use of a single deflator that may include cyclical biases. National income can be measured both by adding up production or incomes on the one hand, or expenditure on the other. This is because production generates equivalent values of incomes for the factors that contribute to the process of production. Ideally, the two estimates should be the same, but in the case of India there have been sizeable discrepancies between figures arrived at from these two approaches. This discrepancy primarily arises because of absence of appropriate price indices. Expenditure values are measured in consumer prices because that is the price consumers pay while buying goods and services, but production values are calculated using WPI instead of producer prices. There is no law to enforce compulsory disclosure of producer prices and hence these are approximated by WPI. Also, India has a vast informal sector whose dynamics are captured by assuming strong positive correlation between the formal and informal segments. However, the informal sector was badly hit during demonetisation, implementation of GST and during the pandemic and may not be in sync with the trends of the formal sector. Hence, using trends of the formal sector to approximate values for the informal segment will overestimate the performance of the economy. IMF also points to the lack of seasonally adjusted data and the room for improving estimation by using updated statistical techniques.
Structural Incongruency
The GDP estimates of the second quarter show high growth driven by manufacturing and services. The manufacturing sector records a growth of 9.1 per cent, which was 7.7 per cent in Q1 this year and 2.2 per cent in Q2 of the previous year. The other sectors which show high growth are finance, real estate and professional services, growing by 10.2 per cent, and public administration and defence and other services at 9.7 per cent. By broad sectors, the real growth of gross value added in the primary sector has fallen from 3.5 per cent in 2024-25 Q2 to 3.1 per cent in 2025-26 Q2. The secondary sector growth in the current year Q2 is 8.1 per cent, higher than the growth rate of 4 per cent recorded in 2024-25 Q2 but less than 15.8 per cent recorded in 2023-24 Q2. In case of the tertiary sector, the Q2 growth of real gross value added is 9.2 per cent in the current year, 7.2 per cent in the previous year and 7.5 per cent in the second quarter of 2023-24.
Surprisingly high growth in manufacturing is accompanied by decline in consumption of steel and production of coal, a negative growth in mining sector and decline in the sales of private vehicles. Also, growth of cargo handled by sea and airports has declined in the same period. Energy production has grown at only 4.4 per cent when manufacturing is growing at 9.1 percent. Furthermore, according to the official figures on components of GDP from the expenditure side, 62.5 per cent is accounted for by private final consumption expenditure (PFCE) and 30.5 per cent by gross fixed capital formation (GFCF), which is a measure of investment. Therefore 92.5 per cent of GDP is accounted by these two components. According to government figures, of these two major components PFCE has grown by 7.9 per cent and GFCF by 7.3 per cent, both less than the 8.2 per cent growth rate recorded for overall GDP.
The issues related to GDP figures have been in the public discourse for quite some time. In fact, higher economic growth is not independent of its constituents. There is a consistent decline in the growth of private investment in productive activities in India for more than one and half decades. The growth of consumption demand has only picked up recently, but still the growth of PFCE is lower than the overall GDP growth. Unemployment rate has moderated, but continues to be higher than historical long-term trends and unemployment among educated youth continues to be very high. The share of self-employment within the workforce increases. According to official figures, they earn less than average regular workers. The female labour force participation increased largely on account of unpaid labour. Only 2 per cent of establishments in India employ more than hundred paid workers, average expenditure on R&D by private enterprises is lower than the average of G20 countries. The share of stock of FDI to GDP is also much lower than the average of middle-income developing countries. All these long-term trends raise question about the credibility of the growth figures. While the IMF indicated some important methodological issues pertaining to India’s growth estimates, it hardly pondered about the structural incongruencies underlying these estimates.
