India’s economic growth rate – Inflation has a starring role in 2023-24 growth

Source: The post India’s economic growth rate has been created, based on the article “Inflation has a starring role in 2023-24 growth” published in “Live mints” on 5th March 2024.

UPSC Syllabus Topic: GS Paper 3-Indian economy – mobilisation of resources, growth, development.

News: The article discusses India’s impressive economic growth and low inflation rate, as measured by the GDP deflator. It suggests that official inflation measures may need updating, considering changes in consumer habits and the impact of technology on prices.

What is the status of India’s economic growth rate?

Growth Acceleration: India’s economic growth rate is likely to increase from 7% in the fiscal year 2022-23 to 7.6% in the current fiscal year ending on March 31.

Nominal vs. Real Growth: The nominal growth rate for 2023-24 is estimated at 9.1%, with real growth at 7.6%. This distinction is due to the low inflation rate used in calculations.

Inflation Anomaly: Despite the GDP deflator indicating a low inflation rate of 1.5% for 2023-24, consumer experiences, like rising costs of eggs, tomatoes, and onions, contradict this.

Previous Year’s Data: In the fiscal year 2022-23, India’s nominal growth rate was 14.2%, and real growth was 7%, indicating an inflation rate of 7.2%.

How do different inflation measurements compare?

GDP Deflator Inflation: For the fiscal year 2023-24, India’s GDP deflator shows an exceptionally low inflation rate of 1.5%. This figure significantly deviates from consumer experiences and other inflation indicators.

Consumer Price Index (CPI): The CPI, which reflects retail inflation, hasn’t shown a similar drop to that indicated by the GDP deflator. It remains higher, suggesting a disparity in measuring consumer-facing inflation.

Wholesale Price Index (WPI): Contrary to the CPI, the WPI has been negative for much of 2023-24, aligning somewhat with the low inflation indicated by the GDP deflator.

What changes are seen in consumption patterns?

Decline in Food Share: In India, the proportion of food, especially cereals, in consumption has decreased for both rural and urban populations.

Rural Consumption Shift: In rural areas, the share of food in the average consumption basket fell from 59.4% in 1999-00 to 46.4% in 2022-23.

Urban Consumption Shift: For urban areas, the share of food dropped from roughly 48.1% to 39.2% in the same period.

What should be done?

Revise Inflation Measurement: Given the disparity between the GDP deflator’s low inflation rate and other indicators like CPI and consumer experiences, India should consider revising its inflation measurement methods.

Reevaluate CPI Composition: Adjust the Consumer Price Index (CPI) to reflect the changing consumption patterns, particularly the decreased significance of food items.

Maintain Comparability: Any revisions in measuring inflation should preserve the ability to compare data with past records, ensuring continuity and reliability.

Question for practice:

Discuss the discrepancies between India’s GDP deflator’s low inflation rate and other inflation indicators like the Consumer Price Index (CPI) and consumer experiences and suggest potential measures to address these disparities.