Relevance: GS-3 (Economy – Growth, National Accounts) | Source: The Indian Express, IMF Article IV Review

India’s Q2 GDP growth stood at 8.2%, outperforming expectations. Manufacturing, services, festive-season demand and front-loaded production boosted output.

However, the IMF’s Article IV review assigned India’s national accounts a ‘C’ grade (second-lowest), flagging data-quality and methodological issues.
This creates a paradox: strong growth, but questions about how accurately it is measured.

Why Does Growth Look High?

1. Real vs Nominal GDP

• Real GDP removes inflation → shows true production volumes.
• Nominal GDP includes inflation → slowed this year due to lower price rise.
• Lower inflation ↓ nominal GDP → but ↑ real GDP (after adjustment).

2. GDP Deflator

GDP Deflator = (Nominal GDP / Real GDP) × 100

• 2024–25 saw an unusually low deflator → boosting real growth.

3. Base Effect

Last year’s weak quarter makes this year’s growth look stronger in percentage terms.

4. Sectoral Drivers

• Manufacturing + Services: ~9% growth
• Private consumption: up by ~90 basis points
• Government spending: GST cuts + fiscal push
• Investments: strong but moderating

Thus, the economy looks strong on paper, but low nominal growth + high real growth creates a “Schrödinger-like economy” — both booming and slowing simultaneously.

Why IMF Gave a ‘C’ Grade?

• Outdated base year (2011–12) — global norm is revision every 5 years.
• No full Producer Price Index (PPI) — India still relies partly on wholesale prices.
• Large discrepancies between GDP (production vs expenditure models).
• Weak informal sector coverage — India’s unorganised sector is hard to measure.

The Way Forward

• Update GDP base year to 2022–23 (work ongoing).
• Finalise a modern Producer Price Index (PPI).
• Improve informal sector surveys, service-sector price indices.
• Use big data: GSTN, MCA-21, digital payments, satellite data.
• Strengthen NSO and adopt global best practices.

MCQ

Q. Consider the following statements:
1. GDP deflator is the ratio of nominal GDP to real GDP.
2. A fall in the GDP deflator increases real GDP growth even if actual output does not change.
3. Producer Price Index is currently used as the official base for Indian GDP calculations.

Which of the above are correct?

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

Answer: (b)