Indian economy expected to grow 7%: How GDP forecasts changed in 3 years

The average variation in value added is 1.5 percentage points between the first and last estimates

On January 6, India released its first estimate of the full-year real gross domestic product (GDP), which represents the value of goods and services produced in the economy adjusted for inflation, projecting a 7 per cent growth over the last year. However, a Business Standard analysis indicates that GDP may undergo a full percentage point revision once the final numbers are released after three years.
 
On the output side, there are higher variations as the gross value added can undergo an average 1.5 percentage point variation from the first advance estimate to the final.
 
Analysis shows that in 2020-21, the difference between the first advance estimates and the first revised estimates (the fourth iteration of GDP released a year after the first release) was 1.9 percentage points. While the first advance estimates had projected a deceleration of 6.7 per cent, the first revised numbers indicated a 4.8 per cent contraction in GDP numbers.
 
In 2016-17, the last or sixth iteration of GDP had projected a 1.7 percentage point jump in economic growth compared to the first advance estimates.
 
Annual revisions to the GDP are a common feature for most countries. These revisions usually take place over a horizon of two-three years. In India, the estimation of GDP is a three-year exercise where the number is revised five times after the first advance estimates are released. In the US, on the other hand, GDP is revised four times.
 
In the US, the average variation in quarterly estimates, revised twice after the initial release, showed a 1.2 percentage point variation in the first and the final numbers.
 
A closer look at GDP variations also indicates the directions of these revisions and the factors contributing to these variations.
 
On the expenditure side, where GDP is calculated using consumption, investment and trade, the major difference comes from government consumption. Analysis shows that the government’s final consumption expenditure was underestimated in all seven years (2015-16 to 2020-21) for which data was considered. A significant reason could be the government overestimating its spending and then paring it down over the years. The average rate of overestimation was 9 per cent between the first and final numbers.
 

 

In 2020-21, the numbers for government spending were revised down from Rs 17.1 trillion for the first estimate to Rs 15.8 trillion for the fourth one.
 
This phenomenon is also evident from the difference between the budget estimates and actual numbers.
 
In the case of private final consumption expenditure, the direction is less evident. In five of the seven years for which data is considered, consumption by corporations and individuals was underestimated by the government by an average of 2 per cent.
 
Another interesting trend is the change in the direction of exports. Until 2018-19, India underestimated exports, but the cycle has turned. Now, India’s export performance has been consistently underestimated by 2 per cent.
 
On the output side, the data on public administration, defence and other services confirm the government consumption pattern, as it has been consistently overestimated by 5 per cent.
 
Agriculture income/output, on the other hand, was underestimated consistently by the tune of 2.65 per cent, so were trade, hotels, transport, communication and services related to broadcasting.
 
That does not mean that the first estimates are unproductive, but the researchers must account for these variations as they analyse GDP numbers.