Misconceptions mustn’t prevail over the reality of India’s GDP estimates

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.

Quarterly estimates follow similar logic, but with fewer detailed accounts. They rely on advance filings by listed companies, government financial data and high-frequency indicators such as the Index of Industrial Production and electricity generation.

Overall, both annual and quarterly GDP involve a mix of current-price and constant-price estimates. About two-thirds of annual estimates start in nominal terms and are then deflated, with a slightly lower share in quarterly data. This sequence is important: where constant-price estimates are inflated forward, a ‘low’ deflator would actually understate—not overstate—real GDP growth.

Is India unique in its CPI-GDP deflator divergence?: A second recurring charge is that India’s GDP data is suspicious because the GDP deflator behaves very differently from CPI inflation. For example, in the first quarter of 2025-26, real GDP grew 7.8% while nominal GDP grew 8.8%, implying a deflator of just 0.9%.

Some commentators have found this “too low” compared to CPI inflation. I have written on this topic earlier as well (shorturl.at/Eclot), but would need reiteration given that this confusion persists. The divergence between CPI and GDP deflators is not unique to India. Across countries, they often diverge, sometimes significantly. This is for well-understood reasons.

The Federal Reserve Bank of St Louis’ blog that explains complex economic issues using data and simple language had an excellent explanation on 27 March 2023 (shorturl.at/FZnt6). It points out that in the US since the 1970s, the CPI has risen nearly 30% more than the GDP deflator. The reasons, in essence, amount to differences in the coverage of GDP and household consumption. The World Bank’s Global Inflation Database (shorturl.at/JbQdL) compiles CPI, producer price index (PPI) and GDP deflator data for nearly 200 economies. It shows that divergences are the norm worldwide. These are influenced by the different shares of tradables and non-tradables in the basket.

India’s recent low deflator is not an anomaly: WPI inflation has been near zero or negative, dragging down the deflator, and the CPI, by contrast, stayed positive because household consumption baskets are less sensitive to global commodity deflation. The last quarter’s small gap between real and nominal GDP is thus a reflection of real price trends, not statistical manipulation.

The question we fail to ask: A key question is why India’s WPI inflation has turned so low (even negative in recent months)? The answer lies in the WPI’s structure. It is dominated by tradables. Nearly 80–85% of its basket comprises globally traded goods—manufactured products, petroleum, metals and traded primary articles. When global commodity prices soften—be it due to excess capacity in China, low crude oil prices or weak demand in global manufacturing—these disinflationary impulses are directly transmitted into India’s WPI.

By contrast, the CPI tells a very different story. Only about 35–40% of its basket is tradables; the rest is non-tradables such as services, housing, education and health, which are largely insulated from global price cycles. The CPI is thus more influenced by domestic food prices and local consumption conditions.

This structural divergence explains why the WPI has fallen sharply even as CPI inflation has remained positive. India is effectively importing global disinflation through its wholesale price basket, while retail prices reflect the stickier realities of domestic non-tradable goods and services.

These divergences have had real consequences for the economy. The accompanying graph shows a steady decline in the share of manufacturing in quarterly gross value added (GVA). The challenges faced by this sector are exacerbated by our narrow focus on retail prices while ignoring the pricing challenges faced by our manufacturers that address globally competitive markets. Long periods of high interest rates to contain non-tradable domestic inflation make it harder for them to compete with imports from lower-cost regimes.

Misinterpreting data mechanics can lead to damaging narratives. Allegations of ‘data fudging’ not only erode trust in institutions, but also distract from the real message: India’s economy has shown resilience, with growth underpinned by construction, investment and public services. However, the aggregate figure hides persistent weakness in the manufacturing sector. The low deflator is not a problem, but a signal that our inflation targeting regime has costs.

India’s GDP estimates are robust, produced by a professional statistical system that makes the best use of available data. The real issue is not the credibility of our statistics, but their interpretation. Talking of supposed ‘statistical mysteries’ distracts from real challenges: resilience in overall growth, but persistent weakness in manufacturing, amplified by the tradables/non-tradables gap.

GDP deflators like the CPI and WPI each tell a different story. Understanding how they differ—and why—is essential if our debate is to illuminate rather than obscure the real state of the Indian economy.

The author is a visiting professor at the Institute for Studies of Industrial Development and former chief statistician of India.