Does GDP matter in a crisis?

As the Iran crisis escalates, asset classes stumble and tumble, several problems like LPG shortages loom large, experts contend that a prolonged war can dent India’s GDP growth by a per cent or two. Instead of a more than seven per cent growth, we may be back to the age-old five per cent ones. Hence, talking about growth in such a scenario may seem meaningless. What may be important is how much can India suffer and sustain, and how fast can it recover, before it makes the transition towards another take off?

But even as economists and policy-makers grapple with this adverse and stark scenario, a new research paper states that calculations about the country’s GDP are irrelevant for another reason. For the past two decades, they were calculated wrongly, and not just because of old series. Although many of the aspects may be corrected in the new recently-launched series, and others may get perfected in the future, India may still get the GDP estimates wrong. The new series does admit to some of the mistakes inherent in the old one.

According to media reports, a new research paper by several authors, suggests that the “official data may have mis-estimated the country’s growth trajectory over the past two decades.” Indeed, the GDP was possibly underestimated by 1-1.5 per cent between 2005 and 2011, and overestimated by 1.5-2 per cent between 2012 and 2023. Thus, instead of the “steady high growth” that the policy-makers claimed over two decades, there was a huge mismatch. According to the authors, the breaking point or transition point was the ‘Great Recession,’ or 2008.

One can pinpoint several factors to explain the dichotomy, or problem areas. One of the most prominent, which this newspaper has regularly highlighted in these columns, is the transfer of data from the formal sector to the informal one. In a sense, the former was used to estimate the latter, which constitutes almost half of the overall gross value-added. The approach became problematic after several policies hit the informal sector more disproportionately than the formal one, and these include demonetisation, launch of GST, and the pandemic.

“While the formal firms recovered relatively quickly, many smaller enterprises struggled or shut down. Yet the GDP methodology effectively assumed that the informal sector was growing at the same pace as the formal one,” states a media report. In fact, the research shows that while the formal sector grew at a faster clip of 10 per cent since 2015, the rate of annual growth in the informal one was a mere 6.7 per cent. This created a huge divergence. The new series aims to set this right via an annual survey of the informal sector. But this may not be enough, as it will be highly subjective, and may be biased.

A second problem area was that several sectors relied on the wholesale price index for the deflators to convert nominal output, or actual output, into real growth, or growth adjusted against inflation. These calculations, or deflators, as they are called, are unduly affected by the changes in commodity prices, especially oil and oil-related ones. Between 2011 and 2025, sadly, the wholesale price inflation was 2.2 per cent lower than consumer price inflation, which is the crucial figure. Hence, the output prices were possibly understated, so was inflation, which pushed up the real GDP, or the figure that we know of.

The new research points to a third divergence, which seems a bit mysterious. “After 2011, the GDP growth appeared to diverge sharply from several widely-used economic indicators. Exports, bank credit, industrial production, tax revenues, and electricity consumption showed a sharp slowdown after the mid-2000s boom. Yet, official GDP data suggested that the economy continued to expand at a similar pace,” states the media report. For example, bank credit growth fell by a third, from 15.6 per cent in 2005-11 to 5.6 per cent after that, and industrial production slowed down too. These raise questions about GDP.

In a nation like India, individual sectors diverge sharply from overall trends, and even if the relationship between the sectors and GDP is “tight,” the correlations often break down as the economy evolves, changes, and transforms. However, if each of the six parameters that the new research included, “posted double-digit growth (annual average) in the first period (2005-11), and collapsed in the second (2012-23),” there are inherent issues with the calculations. In the two periods, apart from real credit and production mentioned above, real exports fell from nearly 14 per cent to 5.4 per cent, and direct tax revenues “slumped from 13 per cent to seven per cent a year.”

Several researchers pointed out the breakdown between the correlations. They maintained that this suggested that “something may have gone awry.” According to the new research, “Divergences between corporate sales, investment, and official GDP growth have previously been interpreted as warning signals of possible measurement issues…. These breakdowns suggest problems in the measurement of nominal output, price deflators, or the proxying of economic activity….” The same was witnessed over the past 12 months, when the data about external disruptions did not match some of the other data.

Despite the high American tariffs, exports went up in several months. If the industrial production figures were up, the numbers for the core sector were down, or the surveys among managers showed variance. Similarly, despite complaints from the corporate sector, and surveys that showed low consumer buying sentiments, the GDP growth in the first half of 2025-26 was a massive eight per cent. Indeed, after the GST tax cuts in September, the estimates were lower. Such divergences confuse experts, and the media continues to choose the figures that best suited its bias or ideology. The critics were happy, so were loyalists.

“For much of the past decade, experts had raised questions about the methodology used to estimate GDP. These doubts spread to the wider public in 2016, when the demonetisation, and withdrawal of 86 per cent of the country’s currency apparently caused real GDP to accelerate to an eye-popping annual rate of 8.3 per cent. The resurfaced in 2019, when a credit crunch caused by a crisis in India’s non-bank financial institutions apparently caused only a minor blip in growth. Then, in June 2025, with private investment and job creation weak but GDP apparently booming, two former officials… expressed concern that ‘something does not add up,’ states the research report.