Anomaly in Q1 GDP: What led to the confusion?

After questions were raised on the GDP numbers announced yesterday, the government is in damage control mode.  It is likely to revise the GDP at market prices. Finance Minister Pranab Mukherjee says this revised figure will be made public soon.

CNBC-TV18's Banking Editor Latha Venkatesh gives a lowdown on the genesis of the confusion.

Here is a verbatim transcript of her comments on CNBC-TV18. Also watch the accompanying video.

The genesis of the confusion was apparent yesterday at 11 am when the numbers were announced. At factor cost in constant prices GDP is growing at 8.8%. Logically you should assume that there should be good capital formation, logically you would assume personal consumption expenditure should grow strongly and both those seriously disappointed. Those numbers are calculated at market prices and they are not calculated at factor cost. That is where the discrepancy was showing up loud and clear.

As to what will happen henceforth the deflator has been wrongly applied and it looks like the most legitimate explanation. We have to always look at GDP at constant prices. If you look at it at current prices simply because of a price rise the GDP will look very big.

In fact GDP at current prices is also released and at current prices at factor cost the GDP has grown by 21% and at market price it has grown by 24.5%. So current prices don't help, but you can only calculate in current prices. You take the prices of all the goods and services and then you deflate it, you bring it as if you are calculating it at 2004-2005 prices.

Now our hunch is that the deflator would have mechanically applied, these are fed into the system, and are computerized systems so the same deflator that was applied last year and the year before and the previous four quarters have been applied only this time because of the wide discrepancy in probably the CPI and the WPI numbers and also because indirect taxes got changed.

The real difference between counting by way of cost and counting through market prices is that in market prices the taxes are reflected you are adding all indirect taxes. Again subsidies take away from the market price and so you should be deducting subsidies. Since a lot of tinkering happened with both indirect taxes and subsidies in the current budget, the discrepancy was larger. But it still doesn't explain this 5.2% difference between the factor cost and the GDP number.

There is a much more radical questioning that you have to do as to how are deflators calculated and that also brings you to the question as to how are prices calculated. Clearly the WPI and the CPI are also not very good indices. We are going to get a new WPI shortly. So perhaps some of that problem is resolved. But these indices over 50% of the items in the WPI or the CPI don't even get responses because they are of 1995 origin.

So to say that we are not going to question the quality of the statistics is wrong. It is very questionable. The other important fact is to call it a typographical error, you should use un-parliamentary language to describe this. You can't call it a typographical error. It is a serious error in calculation and it is a serious error in how you even interpret statistics. A lot of changes have to be done. This is just something which showed up that the emperor has no clothes.