New Delhi – India's manufacturing implicit GDP deflator turned negative in the April-June quarter, a development that prompted questions from economists given concurrent rises in manufacturing output and input prices. MoSPI Secretary Saurabh Garg has now provided an explanation, highlighting the nuances of the 'double deflation' method used in national accounts calculations.
Understanding the Deflator and GDP Calculation
Garg explained that GDP figures are prepared in two forms: current prices, which reflect the prevailing price situation, and constant prices, which strip away price effects to show real economic growth. The deflator is essentially the ratio between these two measures, indicating price changes within a specific sector.
He stressed that the manufacturing deflator cannot be accurately understood by simply comparing broad inflation measures like the Wholesale Price Index (WPI) or Consumer Price Index (CPI).
The 'Double Deflation' Effect
The core of the explanation lies in the 'double deflation' method, where input and output prices for a sector are assessed separately to calculate value added. In manufacturing, input materials constitute a significant component of costs.
Garg illustrated this with the example of an automobile manufacturer:
- Initial Scenario: An automobile sells for ₹100, with input costs of ₹60. The value added by the manufacturer is ₹40.
- Current Scenario: Input prices for materials like iron and plastics rise significantly, increasing the cost to ₹80 or ₹85.
- Market Impact: Due to market conditions, companies are unable to pass these increased input costs on to consumers, so the final selling price remains at ₹100.
- Reduced Value Added: Consequently, the value added by the manufacturer at current prices plummets to just ₹15 or ₹20 (₹100 - ₹85 or ₹80).
“When we look at constant prices, the value added is Rs 40. But when we look at current prices, the value added is only Rs 15. Therefore, it is much lower than the constant price value add. And that is why in manufacturing, you have seen that the current prices value addition, the deflator is negative,” Garg stated.
Implications for Economic Analysis
This divergence creates a substantial gap between current-price and constant-price value addition, leading to a negative manufacturing deflator. The MoSPI's clarification aims to address concerns raised after the 7.8% real GDP growth reported for Q1 FY27, which had prompted questions regarding the difference between current and constant price growth figures.