An unnaturally low rate of inflation pushes up the rate of real economic growth

Govt of India's latest GDP figures signal sond economic management, encourage India Inc to invest, and gives the central bank flexibility in managing the rupee's exchange rate

Repressed inflation pushes up the rate of real growth

It is a matter of considerable cheer for those who have the luxury of knowing the rate of economic growth by official statistics rather than by lived experience that India's pace of economic expansion is accelerating, even as the rest of the world scrambles to avert recession.

Remarkable growth I By forecasting the growth rate of the economy for the present fiscal year, which will conclude by the end of this month, at 7.6%, faster than the 7% achieved in the previous fiscal, CSO has accomplished several things. One, it gives a shot in the arm to GOI's credibility as a good manager of the economy; two, it encourages private industry, whose contribution to fresh investment and capital formation has been rather anaemic so far, to commit to expanding capacity and building infrastructure, now that growth is a reality rather than a tantalising prospect; and, three, it gives RBI some additional leeway in stabilising the rupee, even if a flood of external capital gushes in, chasing returns offered by fast growth.

Inflation collapse I Even more remarkable is the collapse of inflation. The measure of economywide inflation is the GDP deflator. The name is derived from the technical processes through which statisticians manage changes in the assortment of prices for an assortment of goods and services that comprise total economic output. For us ordinary mortals, it suffices to appreciate that the difference between the rate of growth in current prices and the rate of growth in constant prices is a very close approximation of the GDP deflator.

The deflator for gross value added in 2022-23 was, as per the revised data that has also been made available today, 7.3%. The nominal growth rate of GDP in the current fiscal has been forecast at 9.1%, and the real growth rate at 7.6%. That means that the GDP deflator has collapsed to a remarkable 1.5%. If economywide inflation had been marked at a higher level, that would have depressed the real growth rate.

Share of food I Data recently released for monthly per capita consumption expenditure had revealed a decline in the share of food in the consumption basket of all sections of society. This gives statisticians leeway to reduce the weightage of food in the consumer price index. Since food has been one of the most volatile components of the price index, reducing its weightage would have the overall effect of reducing inflation, thereby raising real growth rates.

GDP is gross value added in the period under consideration, plus product taxes net of subsidies. If net taxes rise, that would have the effect of pushing up GDP. That, too, has happened in the current fiscal. Net taxes have risen from Rs22.9 lakh crore in 2022-23 to an expected Rs 27.1 lakh crore in 2023-24.

Rise in investment I The most significant item in GDP data is the share of fixed capital formation in GDP. Total investment comprises fixed capital formation, change in stocks, change in valuables and errors and omissions. The most important is fixed capital formation. In the decade prior to 2014, the share of investment in GDP had touched 38%, and that of fixed capital formation had risen to 35% of GDP. After 2014, it had dipped below 30%, measured in current prices, and stayed there till now.

Fixed capital formation rising above 30% is a signal that investment is picking up and that the economic growth that has been achieved would sustain, rather than disappear.

Final word I The statistical machinery depends on availability of data for its efficacy. The goods and services tax (GST) has made corporate value added available very fast, as compared to the past. Value added by a company is GST paid by it, divided by the rate of GST it bears.

Increase in computerisation economywide and in the government allows faster collection, collation and analysis of data. Accordingly, GOI has now decided GDP no longer needs a third revision to be finalised. The second revision of a GDP estimate now makes it the final estimate. This has happened with the data for the year 2021-22.

lf GOI statisticians are right, India's economy is on a real hot streak.