New method: GDP grew 7.5% in Q3; full year seen at 7.4%

As a result, India has officially overtaken China as the world's fastest-growing big economy: the latter grew at 7.3 percent in the most recent quarter.

The move to the new calculation, in which the economy has been said to grow at 5.1 percent and 6.9 percent in fiscal years 2013 and 2014 -- as opposed to 4.8 percent in each of those years under the old method -- has befuddled many economists, including the chief economic advisor Arvind Subramanian who termed it "mystifying".

GDP at market prices starts with GDP at factor prices and adds indirect taxes while subtracting subsidies.

Is there a disconnect?

"I want to commend the authorities for [moving to] clearly much better measurements," JPMorgan Chief India Economist Sajjid Chinoy told CNBC-TV18. "But the only thing that worries me is that none of these indications are consistent with the other high-frequency data that we see in the economy."

Much of the criticism related to new method of GDP calculation stems from the fact that even as the numbers indicate economic activity has picked up steadily from the depths of the 2012-13 downturn, from 5.1 percent then to 7.4 percent (expected) this year, the revival is not reflecting in other data points (trade data, auto sales, IIP), tax collections, credit growth or even business leaders' anecdotal accounts of sentiment or on-ground activity.

Brushing aside concerns of a disconnect between the revised GDP numbers and other economic indicators, former chief statistician Pronab Sen said that since the rebasing, the government has moved to capturing value added rather than actual production value in sectors such as manufacturing.

"IIP is still a good indicator of what is happening to levels of physical production. But the value-added method has other things built into it, such as: what is the relative price between the outputs and the inputs? So, you can have the same output and if input prices go down the value added goes up," Sen said.

"The story is not of an economy, which is growing faster because output is growing faster, it is a story where incomes are growing faster because value addition is going up," Sen said, using the analogy of automakers: that they may not necessarily be selling more units of cars or pricier ones but now are manufacturing at a more efficient cost.

Other changes

The government also pegged the GDP deflator for FY15 (used to account for inflation -- which is added to real growth to arrive at nominal growth) at 3.8 percent, to reflect the recent fall in prices, compared to 6.2 percent in FY14.

As a result, despite the increase in expected real GDP growth, nominal FY15 GDP growth forecast has been cut from 13.6 percent to 11.5 percent now.

This means that the government may now find containing the fiscal deficit at its oft-stated target of 4.1 percent of GDP tougher than before. Under the new calculation, India's absolute nominal GDP will stand at Rs 126.5 lakh crore, instead of Rs 128.75 lakh crore, as forecast in the Budget.

The scale down in nominal GDP growth rate means, in absolute terms, fiscal deficit will have to be contained at Rs 5.2 lakh crore, instead of Rs 5.3 lakh crore.

FY15 sectoral growth

According to CSO's Kumar, the government expects the following sectoral growth this year.

- Mining sector growth seen at 2.3 percent vs 5.4 percent (YoY)- Construction at 4.5 percent vs 2.5 percent- Financial services at 13.7 percent vs 7.9 percent- Manufacturing at 6.8 percent- Services at 10.6 percent- Industry at 5.9 percent- Agriculture at 1.1 percent