• Definition: The GDP deflator is a measure of inflation in the economy, calculated as the ratio of nominal GDP to real GDP.
• Components: It includes Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation figures, weighted approximately 65% to 35%.
Real GDP Growth in FY24
• Projection: The National Statistical Office (NSO) has projected real GDP growth at 7.6% and nominal GDP growth at 9.1% for FY24.
• Deflator Impact: The deflator for FY24 is around 1.5% year-on-year (y-o-y), significantly lower than the 7% y-o-y in FY23. This low deflator has contributed to the high real GDP growth.
Factors Contributing to Low Deflator
1. Negative WPI Inflation: • WPI Inflation: Averaged at (-)0.7% in FY24 compared to 9.6% in FY23.
• Impact: This negative WPI has lowered the overall GDP deflator, boosting real GDP figures.
2. Sectoral Deflators: • Manufacturing: The deflator for manufacturing was negative at (-)1.7% y-o-y for FY24, largely due to negative WPI inflation.
• Services: The services deflator grew at a slower rate of 1.8% y-o-y compared to 7.6% in FY23, due to higher CPI inflation which averaged 5.4% in FY24.
Benefits of Low Deflator
• Real GDP Boost: A low deflator enhances real GDP growth as the inflation-adjusted value of goods and services appears higher.
• Company Profits: Reduction in input costs supported nominal growth of companies’ profits, contributing to overall GDP growth.
Challenges and Paradoxes
• RBI’s Inflation Targeting: Despite the low deflator, the Reserve Bank of India (RBI) cannot reduce interest rates significantly due to its inflation-targeting framework, which focuses on CPI.
• Sustainability: Economists expect the GDP deflator to pick up to 4.7% y-o-y in FY25 due to rising WPI inflation and global commodity prices, potentially exerting downward pressure on real GDP growth.
Sectoral Analysis
1. Manufacturing: • Impact: The negative manufacturing deflator provided a significant boost to real GDP growth.
• Future Outlook: With expected increases in input costs, the support to profit growth from low input prices may diminish in FY25.
2. Services: • Impact: The deflator for services showed lesser moderation due to the higher weight of CPI.
• Future Outlook: The services sector may face moderate growth due to stable CPI inflation.
Conclusion
The low GDP deflator in FY24 has played a crucial role in boosting India’s real GDP growth. By reducing the impact of inflation on GDP calculations, it has highlighted the underlying growth in the economy. However, with expected changes in inflation dynamics and input costs, the real GDP growth may face new challenges in FY25. Policymakers and economists will need to closely monitor these trends to sustain growth while managing inflation effectively.
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