Source: IE
Context:
The International Monetary Fund (IMF), in its Annual Article IV Review, has assigned a ‘C’ grade to India’s national accounts statistics, including GDP and GVA. This grade is significant as India is set to release the Q2 FY25 national accounts data on Friday.
Meaning of ‘C’ Grade
- A ‘C’ grade indicates that data have shortcomings which hamper effective surveillance.
- Four grading categories exist: A, B, C, and D.
- For overall data quality across all categories, India received a ‘B’ grade.
Weaknesses Cited by IMF
1. Outdated Base Year (2011–12)
- The national accounts still rely on the 2011–12 base year, making GDP estimates less reflective of current economic structure.
- The IMF recommends updating it to capture changes in consumption, production, and technological shifts.
2. Use of Wholesale Price Index (WPI) for Deflators
- Due to the absence of Producer Price Indices (PPI), India uses WPI as a deflator.
- This affects the accuracy of real GDP estimates, especially in a services-led economy.
3. ‘Sizeable Discrepancies’ in GDP Estimates
- The IMF flagged periodic mismatches between:
- Production approach, and
- Expenditure approach of GDP.
- These discrepancies suggest:
- Inadequate coverage of the expenditure-side data, and
- Limited reflection of the informal sector, which is a major part of India’s economy.
Approaches to GDP Measurement in India
1. Income Approach (Primary method used by India)
Measures GDP by adding up incomes earned by:
- Government
- Households
- Companies
2. Expenditure Approach (Supplementary estimate)
Measures GDP by calculating spending by:
- Households
- Businesses
- Government
- External sector
Differences frequently arise due to:
- Different data sources
- Coverage gaps
- Limited visibility of informal sector activities
