India’s GDP puzzle: Robust growth defies its own key indicators

Before stating the obvious, here is a backgrounder for the perspective.

In June 2019, former Chief Economic Advisor (CEA) Arvind Subramanian dropped a bomb: India’s GDP growth was overestimated by 2.5 to 3.7 percentage points per year during FY12 and FY17. He had used 17 high-frequency indicators (HFIs) for his calculations.

This evoked a strong reaction from the Economic Advisory Council to the Prime Minister (EAC-PM), which rejected his findings as an “attempt to sensationalise”, questioned the proxies he used and promised to bring a point-by-point rebuttal — which never came.

The Economic Survey of 2019-20 carried a chapter titled “Is India’s GDP Growth Overstated? No!” to rebut Subramanian and was written by someone called “Anonymous”. Probably a first in the history of the Economic Survey of India.

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The reaction provoked Subramanian to drop another bomb the very next month.

GDP estimation

He wrote, “Since the underlying data are not available publicly, nobody outside the CSO can “estimate GDP”. Outsiders can only check to see whether the GDP estimates are plausible, broadly satisfying some macro-consistency checks.”

PC Mohanan, former acting chairman of the National Statistical Commission or NSC (2018-2019), said at the time that India had never before used data for GDP estimates that were not in the public domain. That changed with the 2011-12 GDP series.

This overestimation of GDP growth was significant.

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India claimed it had surpassed China to become the fastest-growing major economy in 2015. Later, the World Bank and International Monetary Fund used this data to stamp India as the fifth-largest economy in 2023 — surpassing the UK — and would be the fourth largest later this year — surpassing Japan. It now aspires to be “Viksit Bharat” by 2047.

The Federal decided to check if the GDP growth still outstrips that of the formal sector HFIs — used by economists as proxies for growth. For this, we compared the average growth rate of GDP with the average growth rate of 19 formal sector HFIs and found that it indeed is the case.

GDP outruns formal sector indicators

The Federal used 19 HFIs, used as the proxies for formal sector growth, almost all of which were used by Subramanian and more. These proxies are also used by the Finance Ministry in its monthly reports (MERs) and annual Economic Surveys and so does the Reserve Bank of India (RBI) in its monthly bulletins to analyse the state of the economy — although selectively, to give misleading pictures of higher than actual growth.

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The net result is presented in the graph below. The GDP growth is overestimated by 2.3 to 4.3 percentage points during FY23-FY25 and Q1 of FY26.

This should be shocking because these proxies (HFIs) are all growth indicators of the formal sector. In 2015, the Ministry of Labour and Employment found that the informal sector accounted for “nearly half of the GDP of the country”. No further studies have been done.

But the three economic shocks — demonetisation, GST and pandemic lockdowns — forced workers to migrate back to informal and low-paying agriculture.

The agriculture sector’s share of workers went up (up from 42.5 per cent of total in 2018-19 to 46.1 per cent in 2023-24), but its income share fell (from 18.5 per cent to 14.4 per cent of total GVA or gross value added in FY25).

No wonder the post-pandemic recovery has been even more K-shaped than earlier — the formal sector growing faster than the informal sector.

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So, the GDP, which has a 50 per cent or more share of the informal sector, can’t outpace the formal sector growth that the growth in HFIs represents (proxies).

But here is a dramatic reversal.

Before explaining this anomaly, continuing since the 2011-12 GDP series was introduced in January 2015, first about these proxies.

19 formal sector proxies for growth

The HFIs used here are: FMCG or fast-moving consumer goods (volume), bank credit (non-food), bank credit (industry), gross FDI (Foreign Direct Invest) inflows, index of industrial production (IIP) of manufacturing goods, electricity, cement, steel and the general IIP index, production index of eight core industries, manufacturing of passenger vehicles and two-wheelers, sale of tractors (units), railway freight traffic, port cargo traffic, consumption (volume) of petroleum and its products, gross GST (Goods and Services Tax) collections, exports and imports of goods and services.

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Of these, three data sets are from private agencies that the FinMin and RBI use every month for their analysis: FMCG (NielsonIQ), vehicles (Society of Indian Automobile Manufactures or SIAM) and tractors (Tractor and Mechanization Association or TMA).

A simple average of the growth rates for all these HFIs was taken. It was tested against the average of GDP growth — that is, GDP growth at constant prices and current prices. This is because some of the 19 HFIs are in volume and others are in value (monetary). The examples of the latter are bank credits, gross FDI, GST collections, exports and imports.

Q1 of FY26 growth surprise

Recall the morning newspaper headlines when the Q1 of FY26 data was released on August 29. All of them invariably said the 7.8 per cent growth was higher-than-expected.

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The Federal’s data crunching shows, the divergence is maximum in this case (see the earlier graph), compared to those of FY23-FY25. This is all the more shocking because the quarterly GDP numbers, unlike the annual GDP numbers (FY23-FY25), are largely driven by the formal sector indicators — and hence, should be in sync.

Before offering explanations to this anomaly, here is how the GDP growth compares during FY23-FY25.

More surprises in FY25, FY24 and even FY23

Similar to the Q1 of FY26, the GDP growth surpasses that of the 19 formal sector proxies (on average). In FY25, this is by 2.4 percentage points.

In FY24, the difference is even higher at 3.5 percentage points.

And in FY23, it is 2.3 percentage points.

The question is, why this mismatch?

Factors that make GDP beat HFIs in growth

Subramanian had flagged three “potential causes” for this unusual behaviour in 2019:

(i) Shift from volume metric to financial accounts

(ii) Deflating services by manufacturing deflators and

(iii) Proxying informal by formal activity

All these factors continue to play their role. And then there are some more.

The shift from volume metric to financial accounts occurred as India adopted a unique method: Using untested, unaudited and secret MCA-21 database of the Ministry of Corporate Affairs (MCA) to count industry and services — accounting for 82 per cent of total GVA in FY12 (GDP is GVA at Basic Price + net taxes on products). This change was never explained.

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The practice continues, and hence growth in the volume metric (IIPs) for manufacturing, electricity, cement, steel, etc. can’t match the GDP growth of unverified values the MCA-21 brought.

The MCA-21 is a self-populated database, filled by companies in manufacturing and services. The NSSO verified only the services sector units listed in the MCA-21 base (leaving out manufacturing). In its report of 2019, it said there was an error level of 45 per cent (“about 45 per cent of MCA units were found to be out-of-survey/casualty”).

That is, 45 per cent of services sector units didn’t exist, shut down or engaged in unrelated activities. It also errors in other databases used previously, the Economic Census (EC) and Business Registers (BR) of states, had a relatively lower level of error at 18 per cent.

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The use of GDP deflators (to convert nominal value to ‘real’) has been problematic for decades — and remains unaddressed. India doesn’t have an input price index, and there is no sign of the produce price index (PPI) it had promised to bring a few years ago to solve this issue. Hence, it uses the output price index to deflate inputs — often to present a misleading picture.

Credibility of data

More than the systemic shortcomings, it is deliberate data manipulations through frequent and significant retrospective upward revisions that have damaged the credibility of official data.

Recall how the Centre suppressed the first 2011-12 back series GDP data, prepared by the CSO (Central Statistics Office) for release in January 2015, along with the base year change.

That was never made public. Then the two back series data were released in 2018 — one in July by the NSC and the other in November by the CSO.

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The one by the CSO was adopted as it brought down the GDP growth during the previous United Progressive Alliance (UPA) years, which the NSC hadn’t. In fact, the NSC had shown higher growth during the UPA years than the National Democratic Alliance (NDA) years that followed.

Data manipulations

It was such data manipulations that provoked 108 economists and sociologists from across the world to issue a public appeal in March 2019 to “restore access and integrity to public statistics” and not to “suppress uncomfortable data” (the Centre had junked the consumption expenditure survey (HCES) of 2017-18 for showing rising poverty).

When Subramanian questioned the Q3 of FY24 data (released on February 29, 2024), calling it “absolutely mystifying” and difficult to understand, he was pointing at, among other things, the use of deflators in a manner that the implied inflation was 1-1.5 per cent, while actual inflation was 3-5 per cent.

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Pronab Sen, former chairman of the Standing Committee on Statistics (2019-2024) explains why even quarterly GDP growth (Q1 of FY26) overtakes the HFI growth on which it is largely based (except for agriculture, which is based on states’ surveys).

He says the mismatch arises because the corporate data, which come from large and listed entities, are extrapolated to non-listed and smaller companies and in services, high-frequency indictors like bank credit outflows are in the formal sector, which are extrapolated to the non-formal sector (services).

‘Discrepancies’ the new saviour

Independent economists have long agonised over large “discrepancies” in the GDP numbers in the past few years, especially after the demonetisation and GST derailed the economy. “Discrepancies” are added to the expenditure side of GDP to match the output numbers.

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Ideally, Sen says, it should be between 1-1.5 per cent, more than that is problematic (reflects poor quality data).

Analysis of the GDP numbers shows, “discrepancies” was larger in FY23 (-3.2 per cent), FY25 (-1.6 per cent) and Q1 of FY26 (2.3 per cent).

In the entire 2011-12 GDP series, large “discrepancies” surfaced first in the demonetisation fiscal of FY17 (2.3 per cent), continued in the GST fiscal of FY18 (3.4), later in FY20 (3 per cent) and FY22 (3.3 per cent).

Retrospective revision

Remember that the GDP growth peaked (pre-pandemic) at 8.3 per cent in the demonetisation fiscal (FY17)? After the GST shock further damaged the economy, growth was still robust at 6.8 per cent in FY18. But it nosedived to 3.9 per cent in FY20 without any apparent provocation.

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In February 2025, a massive retrospective revision was carried out.

The new data showed, the GDP growth for FY23 jumped from 7.1 per cent (in the first revised estimates) to 7.6 per cent (in the final estimates), and for FY24, it jumped from 8.2 per cent (in the provisional estimates) to 9.2 per cent (in the first revised estimates).

Along with these changes, the consumption (PFCE) growth for FY24 also jumped from four per cent (in the provisional estimates) to 5.6 per cent (in the first revised estimates).

Subramanian was among many economists who had flagged very low PFCE growth (three per cent) relative to the “gangbuster” GDP growth of 7.6 per cent in early 2024 (while raising the deflator issue mentioned earlier).

Consumption numbers

Consumption is the main growth engine, accounting for 56 per cent of the GDP in that fiscal (FY24), and its fall to less than half of the GDP growth raised doubts about the growth itself.

Following a hue and cry, the consumption growth was revised upward, first to four per cent and then to 5.6 per cent (when the GDP growth was revised to 9.2 per cent).

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Here is another jarring note to the “gangbuster” GDP growth (the term was coined by Subramanian and his colleagues).

An incredibly large Indian population survives on handouts and subsidies — despite a high GDP growth.

Of 1.4 billion, 813.5 million or 58 per cent people receive “free” ration since April 2020; over 100 million families receive cash handouts of Rs 6,000 per annum under the he PM-Kisan; over 100 million families get subsidised LPG (liquefied petroleum gas) cylinders at less than 20 per cent of market price under the Ujjwala scheme and average of 66 million in rural areas work as menial labour at below statutory minimum wages under the MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme).

Then there are subsidised “Bharat Atta” (Rs 30/kg) and “Bharat Rice” (Rs 34/kg) since 2023.

Does any of the above inspire confidence in the GDP growth numbers?