GDP estimates: Misconceptions must not prevail over the reality

Manufacturing: A nominal downtrend Indian data shows a steady decline in the share of manufacturing in gross value added (GVA) at current prices, but real GVA estimates involve inflation adjustments that cut both ways if the deflator is low Share of manufacturing in GVA (in %)

- T.C.A. ANANT is a visiting professor at the Institute for Studies of Industrial Development and former chief statistician of India.

Every release of India's gross domestic product (GDP) data generates intense debate. Analysts pore over decimal points, commentators point to perceived inconsistencies and critics claim statistical sleights of hand. Much of this noise, however, reflects a basic misunderstanding of how quarterly GDP is estimated and how to interpret related price measures such as the GDP deflator. A thread which runs through many analysts' reasoning is that GDP is first estimated in nominal terms (or current prices) and then converted to constant prices by applying a deflator. Another is that India's choice of a deflator underestimates 'true' inflation, so applying a 'low' deflator to nominal GDP overstates real or constant-price GDP.

Which comes first: constant or current price data?: This question often confuses even seasoned commentators. The answer depends on the sector or institution and between annual and quarterly estimates. In annual estimates for the corporate and government sectors, statisticians begin with current-price accounting data—revenues, expenditures and wage bills, as reported in financial accounts. These nominal values are then deflated using indices such as the wholesale or consumer price index (WPI or CPI) to arrive at constant-price estimates, which reflect the real volume of output. For the household and quasi-corporate sectors, where detailed accounts are unavailable, indirect methods are used. Agriculture and construction rely on quantitative indicators like crop production or inputs such as cement and steel. Retail trade is proxied by growth in tax revenues, while other services draw on corporate filings and government expenditure.