Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

Correction: Wrong Deflator – It's Actually 1.5%

Yesterday we had said that the GDP deflator was 0.2%. This is wrong. The new method uses something called GVA – or Gross Value Added – to indicate the real increase in value that has been seen. And the GVA plus indirect taxes is the GDP. We took the real GDP versus the nominal GDP to calculate the deflator.

However, that is wrong. Indirect tax changes – like Excise or Service tax – is not “real” growth. We should therefore take the Gross Value Added in real terms, and compare it to nominal GDP (which includes indirect tax impact) to find out the true deflator. A deflator basically includes the effect of increase in prices (whether from taxes or inflation, we don’t care).

Thus we recalculated the deflator, and it is at 1.5%. Apologies for that, and here’s the updated graph.

 

image

  • shitij goyal says:

    I am shitij goyal. I am an intern at SPA capital. While reading the edited transcript of the of Reserve Bank of India post policy conference call with researchers and analysts, Two gentlemen from HDFC standard life and Stark capital respectively said that the GDP deflator was 0.2% whereas you have refuted it and said it is 1.5%. Can you elucidate more on the methodology of arriving at your figure. Second, what can we infer from this estimate. Is it good or bad for the economy??
    Thank You