The latest GDP data controversy is not just about revised nominal growth numbers for the first quarter of FY26; it is also about anomalies arising from double deflation - a key change in national accounts statistics that has also been advocated by international agencies such as the IMF.
Former Chief Statistician of India Pronab Sen says that while double deflation, under which output and intermediate consumption are deflated separately, is conceptually correct, obtaining accurate data to implement it could be a challenge.
Sen says that since final goods are relatively fewer in number, deflating final products, or output, is easier. “However, goods used as inputs could be four to five times the number of final products. If those inputs are not deflated correctly, it could result in large approximations, and you do not know which direction the numbers will go,” he explains.
According to the Ministry of Statistics and Programme Implementation (MoSPI), it has used more than 300 individual price deflators at the item or item-group level.
Deflating the value of goods produced means adjusting the value to eliminate the impact of changes in product prices over time, so that the real change in the value of goods produced can be determined. Deflation can, therefore, be loosely understood as a price-adjustment mechanism.
In the first-quarter GDP numbers, the manufacturing sector recorded negative inflation of 1.5% in gross value added (GVA) in Q1 2026-27, despite an increase in both manufacturing output and input prices.
MoSPI attributes this to the use of double deflation. Under the double-deflation approach, the ministry says, output and intermediate consumption of the manufacturing sector are deflated separately, and real GVA is obtained by subtracting real intermediate consumption from real output.
“Therefore, when input prices increase faster than output prices, the relative price movement can result in nominal GVA growing more slowly than real GVA. Consequently, the implicit GVA deflator, which is derived by comparing nominal GVA with real GVA, can show negative inflation even though both output and input prices are rising,” it says.
GVA, in simple terms, measures the value that an industry or sector adds to the economy. It is broadly the value of what a business produces minus the value of goods and services it uses as inputs.
MoSPI has, however, clarified that double deflation does not directly enter the calculation of private consumption.
It says double deflation is a production-side technique used to estimate the GVA of an industry at constant prices by deflating gross output and intermediate consumption separately. Since private consumption is a measure of final demand; expenditure on goods and services for final use, it has no intermediate consumption to subtract.
Meanwhile, on the divergence between the 2.5% inflation implied by the GDP deflator and consumer inflation of 3.9% and wholesale inflation of 9%, MoSPI says the GDP deflator is an implied price measure of net value added, rather than a direct measure of transaction prices.
“There is no inconsistency because the GDP deflator, CPI and WPI measure different aspects of the economy and have different coverage and weights,” it says.
The ministry further says the implicit GDP deflator covers the entire economy, including government spending, corporate investment, exports, and financial and non-financial services such as banking, IT and real estate.
Since raw material prices were very high while inflation in certain service sectors was very low, it says, the overall GDP deflator was diluted by the low inflation in services.
“Therefore, the implicit GDP deflator need not move in line with either CPI or WPI” it concludes.
