India’s Revised GDP: Base Year And Double Deflation

Source: PIB
GS III: Indian Economy- GDP, National Income Accounting, Inflation

Why in the News?

The Ministry of Statistics and Programme Implementation (MoSPI) released the updated annual and quarterly GDP estimates with 2022–23 as the new base year on 31 August 2026.

News in Brief

• The revised GDP series incorporates updated administrative data and improved data sources.
• It introduces a new Output Producer Price Index (PPI) and Banking Services Price Index.
• The revised methodology includes double deflation in the manufacturing sector, with output and intermediate consumption deflated separately.

Revision of GDP Base Year

• The base year in national income accounting provides the reference prices used for measuring real economic growth and assess changes in the volume of economic activity.
• It is periodically revised because the structure of an economy changes over time.
• Consumption patterns, production structures, relative prices and the importance of different sectors may all change significantly.
• India has revised the GDP base year from 2011-12 to 2022-23 as part of the updated National Accounts series.
• The adoption is therefore intended to make the GDP estimates more representative of present economic conditions.
• The revised series also incorporates updated administrative data and improvements in the methodology used for national income estimation.
• A particularly important change is the introduction of new price indices, including the Output Producer Price Index and Banking Services Price Index.
• These provide more appropriate price information for estimating economic activity at constant prices.

Double Deflation

• Double Deflation is an important methodological improvement in measuring manufacturing GVA.
• Under the earlier approach, changes in prices could affect the measurement of real value added in ways that did not fully capture the separate movement of output and input prices.
• Under double deflation, these two components are treated separately.
• The output of an industry is first converted into constant-price terms by removing the effect of changes in output prices.
• Intermediate consumption is similarly converted into constant-price terms using the relevant input prices.
• The resulting real GVA is obtained by subtracting real intermediate consumption from real output.
• This is important because input prices and output prices do not necessarily move together.
• For instance, if the prices of raw materials and other inputs increase faster than the prices of manufactured products, nominal GVA may grow more slowly than real GVA.
• This can produce a negative implicit GVA deflator.
• A negative inflation in implicit deflator in manufacturing does not mean that manufacturing prices have fallen.
• It reflects the relative movement of output and input prices after they have been separately deflated.
• Even when both output and intermediate consumption rise in nominal terms, their different price movements can result in real GVA growing faster than nominal GVA.

Manufacturing GVA and the Negative Deflator

• The manufacturing sector provides a useful example of how double deflation works in practice.
• During the first quarter of 2026–27, manufacturing’s nominal GVA grew by 7.7 per cent, while its real GVA grew by 9.2 per cent. The difference resulted in a negative implicit GVA deflator of 1.5 per cent.
• This does not imply that manufacturing prices generally declined. Rather, the prices of inputs increased faster than the prices of manufactured output in several activities.
• The activities where this pattern was particularly visible included textiles and cotton ginning, basic metals, and rubber and plastic products.
• The experience is also consistent with international evidence.
• OECD research indicates that economies using double deflation can experience volatile or even negative implicit manufacturing deflators during periods of global energy and raw-material price shocks.
• Countries dependent on imported raw materials can be particularly affected when international supply chains experience major price fluctuations.

Agricultural GVA Estimation

• Agriculture is estimated differently from manufacturing a the quarterly level.
• The constant-price estimate of agricultural GVA is first prepared using production estimates.
• The current-price estimate is subsequently obtained by applying the relevant Producer Price Index.
• During the first quarter of 2026–27, the Output Producer Price Index for agriculture, forestry and fishing increased by approximately five per cent.
• Since agricultural nominal GVA is closely influenced by output prices, its implied inflation remained positive at around 3.9 per cent.
• Thus, the methodology used for agriculture differs from the double-deflation approach used for manufacturing.

Double Deflation and PFCE

• Double deflation is not directly used to estimate Private Final Consumption Expenditure (PFCE).
• The reason is that PFCE measures expenditure by households on goods and services for final consumption.
• Unlike production-side GVA, there is no intermediate consumption component that needs to be subtracted.
• At the quarterly level, PFCE is estimated at a detailed item or item-group level.
• For goods such as food and manufactured products, constant-price estimates are prepared using appropriate volume indicators, after which current-price estimates are derived using relevant consumer price indices.
• For services such as education, healthcare, restaurants and accommodation, current-price estimates are prepared using appropriate output indicators, while constant-price estimates are derived using relevant price indices.
• Therefore, Double Deflation is primarily a production-side technique for estimating real GVA and is not a method directly used for PFCE estimation.

Understanding GDP Deflator, CPI, and WPI

• The latest GDP estimates have also raised questions about why the implied GDP inflation rate can differ considerably from CPI or WPI inflation.
• The baskets of goods used to measure these economic indicators vary according to their purposes.
• CPI measures changes in the prices of a specific basket of goods and services consumed by households at the final consumer level.
• WPI measures price movements of bulk commodities, raw materials and manufactured goods at the wholesale level.
  • It does not cover services.
• The GDP deflator, on the other hand, reflects the price change associated with the entire economy.
  • It is derived from the relationship between GDP at current prices and GDP at constant prices and encompasses government expenditure, corporate investment, exports and a wide range of services such as banking, information technology and real estate.
• Therefore, it is perfectly possible for CPI, WPI and the GDP deflator to show substantially different inflation rates.
• For example, high raw-material prices may push up wholesale inflation, while relatively low inflation in certain service sectors and other components of the economy can moderate the overall GDP deflator.
• The implicit GDP deflator is thus not a direct measure of transaction prices.
• It is a derived measure reflecting the combined price impact of numerous individual deflators used across different components of the economy.
• MoSPI notes that more than three hundred individual price deflators are used at the item or item-group level.

Revision of GDP Estimates

• The previous year’s GDP estimate was revised as part of the regular updating of the GDP series.
• The changes reflect the new base year, improved data sources, revised methodology, updated coverage and the availability of newer information.
• Therefore, the revision should not be seen as an attempt to artificially increase the latest GDP growth rate.
• GDP estimates under different base-year series should also not be directly compared; comparisons should be made using the same, latest series.

Benchmark-indicator Approach

Quarterly GDP estimates use the benchmark-indicator approach, where high-frequency indicators such as crop production, steel consumption and commercial vehicle sales help assess economic activity.

Statistical Discrepancy and GDP Revisions

• GDP estimates are subject to revision as more complete data become available.
• A statistical discrepancy can arise between GDP estimates based on the production and expenditure approaches.
• It is a balancing item and, by itself, does not indicate that GDP has been overstated or understated.
• Future revisions may move in either direction, depending on changes in the underlying data.
• At the final-estimate stage, the discrepancy is expected to become very small or disappear.

Conclusion

The revised GDP series improves the accuracy and reliability of India’s economic growth estimates through better data, an updated base year and improved methodology.

UPSC Prelims and Mains Practice Question

Consider the following statements regarding India’s revised GDP series:

1. The revised GDP series uses 2022–23 as the base year.
2. Under double deflation, output and intermediate consumption are deflated separately to estimate real GVA.
3. Double deflation is directly used for calculating Private Final Consumption Expenditure (PFCE).
4. The GDP deflator, CPI and WPI measure the same basket of goods and services.

Which of the statements given above are correct?

(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 2 and 4 only
(d) 1, 2, 3 and 4

Answer: (a) 1 and 2 only

Mains Practice Question

Q. Discuss the significance of revising the GDP estimation methodology in improving the measurement of India’s economic growth. (150 words)

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