Mumbai: With most analysts refusing to buy into the official growth numbers due to vast differences between gross domestic product (GDP) and gross value added (GVA), a Crisil analysis has blamed the variance to the steeply falling wholesale price index (WPI) and the more-or-less stable consumer price index (CPI).

According to a report formulated by Crisil chief economist Dharmadikari Joshi and his team, “The main reason for the faster growth in manufacturing GDP is that growth in the value of inputs used for production has been slower than the value of the final output."

As a result, the value-added has grown faster than the volume of output. The former is used for calculating GDP while the latter for index of industrial production (IIP).

“The reason for growth in value of inputs being slower than the value of output is that the prices of inputs fell more relative to the prices of output," Joshi said. “This is confirmed by inflation trends where WPI (that captures inflation in commodities used as inputs) has been consistently lower than CPI (that captures inflation in goods sold in retail markets) since the 2008 global financial crisis," he said.

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The report argues that the real manufacturing GDP is obtained by dividing nominal GDP by manufacturing GDP deflater which is composed of the relevant WPI for each sub-sector within the manufacturing sector.

“Therefore, the fall in wholesale inflation has had a greater impact on real manufacturing GDP than retail inflation which further induces real manufacturing GDP growth to increase more than the IIP growth," Crisil said.

It can be noted that many have been questioning the new GDP series for not being aligned with ground-level indicators. The main flaw in the dataprints is that it jacks up the manufacturing GDP over what IIP generally reflects.

The issue has gained notice since the 2008 global financial crisis when manufacturing GDP has been growing faster than IIP. But coinciding with this trend is the divergence in wholesale and retail inflation numbers.

Again since the 2008 crisis, WPI has been trending below CPI. And so is the IIP growth that has trailed GDP growth, the report said.

“The variance may be due to the fact that IIP measures the volume of output, while manufacturing GDP aggregates the value added, which is obtained by subtracting the value of intermediate goods from the value of output," Joshi said.

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