What we miss when we headline higher GDP

A press note by the National Accounts Division on quarterly estimates of GDP for the June quarter estimates an unexpected higher growth rate. However, a closer look at the data shows that it misses a key indicator. According to the data, the growth rate of GDP for Q1 is estimated to be 7.8 per cent compared to the figure of 6.5 per cent for the same quarter last year. It is higher even compared to the 7.4 per cent rate of growth in the immediately preceding quarter, i.e. Q4 of 2024–25.

This unexpected increase in growth is largely due to the sharp increase in the growth rate of the tertiary sector. It has grown at 9.3 per cent compared to 6.8 per cent last year. The secondary sector growth has declined from 8.6 per cent to 7.0 per cent, while the primary sector has grown at 2.8 per cent compared to 2.2 per cent last year.

Major components of the primary and secondary sectors have either declined or shown the same rate of growth as in Q1 2024–25. Mining and quarrying has sharply decelerated from 6.6 per cent to –3.1 per cent, showing a turnaround of 9.7 per cent.

Electricity, gas, water supply and other utility services sector shows a growth of 0.5 per cent compared to 10.2 per cent last year — another decline of 9.7 per cent. The manufacturing sector has the same growth rate as last year, while the construction sector shows a decline from 10.1 per cent to 7.6 per cent.

High frequency indicators

There is considerable divergence in growth rates across sectors. But what underlies the sharp increase in growth in the tertiary sector? To answer this, the methodology adopted for making the estimates needs to be analysed.

The official document states, ‘Quarterly Estimates of GDP are compiled using the Benchmark-indicator method i.e., the estimates available for the same quarter of the previous financial year (2024–25) are extrapolated using the relevant indicators reflecting the performance of sectors.’

It goes on to say, ‘Year-on-Year growth rates (%) reflected in the major indicators used in the estimation are given in the Annexure B.’

However, the data in the annexure indicates a slowing economy compared to 2024–25. Out of the 22 items listed, only five items show an increase compared to last year: cement production, cargo handled at major sea ports, revenue expenditure, less interest payment and subsidies (Union government), exports minus imports and capital goods.

Seven items show a significant decline: production of coal, consumption of steel, sales of private vehicles, cargo handled at airports, railways passenger kilometres, Index of Industrial Production (IIP) mining and IIP electricity. The remaining 10 items show moderate decrease in growth.

Further, these items also suggest a decline in growth in consumption and in the tertiary sector. Finally, the just released IIP data shows that in Q1 of 2025–26 it barely grew by 2 per cent. So, even the secondary sector growth could not have accelerated.

In brief, if the methodology used in the estimation is taken at face value, the rate of growth in Q1 2025–26 cannot not have increased compared to 2024–25.

Missing data

A major issue in the estimation methodology used is the non-availability of data for the unorganised sector. It is proxied by a little bit of organised sector data. For instance, for industries, data is based on ‘Financial performance of listed companies based on available quarterly financial results of these companies’ and IIP.

But the former is available for only a few hundred companies and the latter also does not cover the small and the micro sectors which are a thousand times more numerous than the large and medium units captured in the IIP, and employ 97.5 per cent of the MSME (micro, small and medium enterprises) employment.

So, the assumption that the unorganised sector can be proxied by the few bits of available organised sector data is incorrect.

An example can clarify this further. The growth of the sector involving trade, hotels, transport, communication and services related to broadcasting has increased from 5.4 per cent to 8.6 per cent. This sector has a weight of 16.75 per cent in GVA (gross value added) and consists of both organised and unorganised components. However, the data is available for this is only for the organised sector, such as e-commerce, which is apparently growing at about 25 per cent.

Such strong growth can only be at the expense of unorganised trade, such as the neighbourhood retail stores. So, the higher the growth shown for this component of GDP, the greater would be the uncaptured decline in the unorganised sector.

In brief, a declining component of GDP is proxied by a fast-rising component, thereby leading to an overestimation of GDP. This hypothesis would also apply to the other major component of the tertiary sector and to the manufacturing sector. Further, the overestimation of GDP would impact the other expenditure components, like private final consumption and investment.

The Reserve Bank of India’s latest capacity utilisation and consumer confidence data do not indicate any sharp uptick. Since these are based on surveys of the organised sector, they indicate that there could not be a sharp up trend in either capital formation or private consumption as the official GDP data indicates.

If the hypothesis that the higher the growth rate of the organised sector, the higher the error in estimation of GDP is correct, then indeed, the error has increased. This is the reason for the sharp changes in ‘discrepancies’ since demonetisation.

In brief, the methodology of estimation needs to be changed and more data from the unorganised sector needs to be collected. Till these two features are rectified, higher GDP growth would be suspicious.

Arun Kumar is a retired professor of economics. This piece first appeared in The Wire