Two Factors May Have Exaggerated Q1 GDP Growth, Says HSBC's Pranjul Bhandari

While India's first-quarter GDP grew at the fastest pace in four quarters, statistical issues might have led to some exaggeration, according to economist Pranjul Bhandari.

Gross domestic product grew 7.8% in April–June, a step up from 6.1% in January–March, meeting economists' forecasts.

There is a problem in the manufacturing and services deflator. Bhandari, chief economist for India and Indonesia at HSBC, told BQ Prime in an interview, referring to the adjustment for inflation.

In the manufacturing deflator, the problem is that commodity prices fell in this quarter, she said. The Central Statistical Office does single deflation instead of double. Whenever that coincides with commodity prices falling, manufacturing growth gets exaggerated, she said.

Similarly, for services, the services deflator has too much goods in it, so when goods inflation is falling, services growth gets overstated, Bhandari said.

The GDP deflator, or implicit price deflator, is used to measure and adjust for inflation. From that perspective, WPI is important as it constitutes more than 60% of the weight, according to Bhandari. The moderation in WPI inflation indicates that the GDP deflator was low in Q1, she said.

The second problem is that of base effects. Since the pandemic days, there has been a low base effect, and that has exaggerated growth by one percentage point, she said.

As the base normalises, and rural demand comes under pressure led by the El Nino, we expect GDP growth prints to slow from hereon, averaging 5.8% in FY24, Bhandari said.