GDP Part 2: Just How Messy Is India’s GDP Data?

India is about to reset its economic clock; it’s overhauling how it measures GDP. By the end of next month, it will announce major changes to its GDP measurement system. To understand what’s coming, let’s see just how messy the current system is.

Today, India is among the world’s fastest-growing large economies, the fourth-largest by GDP, and on track to become the third-largest within this decade. By these headline metrics, its GDP profile has never looked better.

Unsurprisingly, the ruling government points to these numbers as validation of its economic policies. The opposition challenges them instinctively.

A common and valid criticism is that India’s absolute GDP size means little when per-capita income remains low, an issue I explore here.

The debate, however, runs deeper: whether India’s GDP looks as large and its growth as high as they are in part because of how GDP is measured. Before we dwell on that issue, let’s look at an objective assessment of India’s GDP measurement, the focus of this post.

Three Levels of Debate

To understand the GDP debate, it helps to separate two broad categories of problems.

1. Long-Standing Structural Challenges

Measuring India’s GDP is inherently tricky: a large informal sector that is hard to track; surveys on India’s scale are complex and expensive, so they’re done infrequently; statistical agencies have limited resources; and economic conditions vary widely across regions. These issues are typical of large developing countries.

2. Methodological Choices

Issues Identified by the IMF

The IMF highlighted the following issues: an outdated base year, gaps in informal-sector data, a flawed deflation methodology, discrepancies among measurement approaches, a lack of granularity and timeliness, and a delayed census.

Let’s walk through the three most important issues.

Issue 1: Outdated Base Year

An outdated base year can make parts of the economy appear to be growing faster (or slower) than they actually are. The current base year (2011–2012) is one of the longest India has gone without an update.

When we calculate Real GDP, we want to know if we are actually producing more “stuff” or if things are getting more expensive. To do this, we ignore today’s prices and use 2011 prices to value economic output.

But what if something that was a luxury in 2011 is now a cheaper, mass-consumed item?

The Smartphone Example:

In 2011 (Base Year): A smartphone was a luxury item. Let’s say it cost ₹12,000.

In 2025 (Today): We produce far more phones, and they are much cheaper, say ₹10,000.

The GDP Math: When calculating Real GDP today, the government doesn’t use the ₹10,000 price. It uses its 2011 rulebook, which still values smartphones at the old, higher price. If India produces 50 million phones today, real GDP values them at 2011’s high price, making the smartphone contribution to GDP look bigger than it would under a more recent base year.

As the base year grows older, the likelihood of such types of distortions (think food delivery, ride-hailing, digital subscriptions) increases.

Issue 2: Informal Sector Data Gaps

Weak informal-sector data can throw off GDP estimates, especially during economic upheaval. The IMF highlights India’s inadequate coverage of its informal sector, an issue it has emphasized in past assessments as well.

There is clear progress. We see roadside vendors accepting UPI, small firms registering under GST, and digital platforms generating data trails.

Nonetheless, a large share of informal economic activity must be estimated without any administrative records.

That estimate relies heavily on extensive household and enterprise surveys, which, among other things, measure the number of informal businesses and their output.

Because nationwide surveys are expensive and logistically complex at India’s scale, they are conducted only once every five to ten years. Between surveys, statisticians extrapolate from old data using assumptions, including using formal-sector data to estimate the informal sector.

Using formal-sector data to estimate informal sector activity can be unreliable during economic flux (think demonetization, COVID, or GST implementation). For instance, larger firms might have adapted better to these events than small businesses, which are much more fragile.

Informal businesses may shut down, expand, formalize, or adopt new technologies faster than assumed. Without insight from updated survey data, GDP estimates of the informal sector could be significantly overstated or understated.

Issue 3: Flawed Deflation Methodology

As discussed in Part 1, deflation means adjusting nominal GDP for inflation to determine real growth. Basically, we divide the nominal GDP by a number (price index). As the denominator increases, the computed Real GDP decreases, and vice versa. Accordingly, the specific “price index” we choose can change how healthy the economy looks on paper.

India has long used the Wholesale Price Index (WPI) to deflate parts of manufacturing output, primarily because it lacked a comprehensive Producer Price Index (PPI), whose use the IMF recommends.

What’s the Problem with WPI?

It tracks the wrong prices for measuring manufacturing value added.

GDP is calculated sector by sector. For manufacturing, the relevant “output” is what leaves the factory gate (the bread the bakery sells).

WPI tracks prices at various wholesale stages, but it does not consistently track producer output prices, the prices relevant for GDP. PPI does.

If PPI is the correct deflator for manufacturing output, using WPI will overstate GDP when WPI is lower than PPI and understate it when it is higher.

Besides switching to PPI, the IMF recommends a better approach to deflation: double deflation.

Double Deflation: The International Best Practice

Here’s what that means:

Single deflation (what India mostly does):

To see if a bakery is actually growing, we first compute its monetary value added: what it earned from selling bread minus what it spent on buying flour. Then, we divide the value added by a “price index (WPI, in India’s case)” to remove the effect of price inflation.

The single-deflation approach works well if the prices of flour and bread change at the same rate. If both go up by 5%, dividing by a single price index keeps the math balanced.

When the math fails: The problem arises if the prices of flour and bread change at different rates. Say, flour gets cheaper, but the price of bread stays the same.

The bakery is now making more profit on every loaf. On paper, its “monetary value added” has gone up. But it isn’t baking more bread; the increase in monetary value added is just due to extra profit.

Sngle deflation sees the extra profit from cheaper flour and incorrectly reflects it as “real growth.”

The Solution: “Double Deflation” 

Double deflation separately deflates the input (flour) and the output (bread):

Step 1: We adjust the Bread Sales using a “Bread Price Index.”
Step 2: We adjust the Flour Costs using a “Flour Price Index.”
Step 3: We subtract the two to find the Real Value Added.

The cost of input (flour) and the price of the final output (bread) don’t move in lockstep. With double-deflation, we “cancel out” the price changes on both sides, giving us a more accurate picture of how much real value the bakery actually added.

Takeaway from IMF Review

The IMF has flagged technical weaknesses in India’s GDP measurement, but it does not conclude that India’s GDP data are fabricated or politically manipulated.

Crucially, the IMF uses India’s official GDP numbers in its forecasts and global economic reports. If the IMF believed the data were fundamentally unreliable or fabricated, it wouldn’t use them, as it does with countries whose statistics it distrusts.

Imperfect GDP data is the norm, not the exception, for developing countries. For perspective, the IMF gave India an overall “B” for its economic data, with a “C” specifically for GDP. China got the same grades: even the world’s second-largest economy faces similar challenges.

Measurement improves gradually as countries build better systems and more of the economy becomes officially recorded. India is no exception.

Picture Abhi Baki Hai Dost (the story isn’t over yet): A Fix Is Around the Corner 

We have very good news! Many of the IMF’s concerns will soon be addressed.

India will introduce a new GDP base year (2022–23) by the end of February 2026—just weeks away.

Additionally, and very significantly, India finally plans to:

• Transition from WPI to PPI-based deflation
• Implement double deflation for a more accurate measurement

The transition to PPI and double deflation are markers of India’s economic maturation: moving from “India should do this” to “India is doing this.”

India also plans to improve its approach to estimating the informal sector and address the discrepancy between estimates from the production and expenditure approaches, a common issue in many developing countries. Please see the cited reference for the Ministry’s details about these changes.

Furthermore, the upcoming census will replace outdated demographic assumptions, an issue flagged by the IMF.

Taken together, these changes will make GDP more accurate and closer to international standards.

Impact

The new 2022–23 base year will lead to GDP-level and growth-rate revisions, with some years showing upward revisions and others showing downward revisions. That’s not a sign of manipulation; it’s simply how major revisions to GDP statistics work.

Inevitably, there will be noise and political spin on all sides. While the new changes will resolve many technical debates, public and political arguments will persist.

The Next Part

Now, with a working understanding of GDP and the genuine limitations of its measurement in India, we’re ready for the GDP-related political debates of the Modi era.

Part 3 awaits.

References