The GDP deflator is an essential measure of inflation within an economy. It is calculated as the ratio of nominal GDP to real GDP, providing insights into the overall price level changes over time.
The deflator incorporates various inflation figures, with the Wholesale Price Index (WPI) and Consumer Price Index (CPI) weighted approximately 65% and 35%, respectively. This combination allows for a comprehensive understanding of price movements.
The National Statistical Office (NSO) has projected a robust real GDP growth of 7.6% alongside nominal GDP growth of 9.1% for FY24. A crucial aspect of this projection is the GDP deflator, which is expected to be around 1.5% year-on-year (y-o-y), a significant decrease from 7% y-o-y in FY23.
This lower deflator has been conducive to high real GDP growth, as it reflects a more favorable economic environment.
A lower GDP deflator has significant advantages. It boosts real GDP growth by making the inflation-adjusted value of goods and services appear higher. Additionally, reduced input costs have supported nominal growth in company profits, further contributing to overall GDP growth.
Despite the positive aspects of a low deflator, the Reserve Bank of India (RBI) faces constraints in reducing interest rates significantly, due to its inflation-targeting framework centered on CPI. Furthermore, economists predict that the GDP deflator may rise to 4.7% y-o-y in FY25, driven by increasing WPI inflation and global commodity prices, which could place downward pressure on real GDP growth.
The negative deflator in manufacturing has substantially boosted real GDP growth. However, as input costs are expected to rise, the support for profit growth from low input prices may decrease in FY25.
The services sector experienced less moderation in its deflator due to the larger influence of CPI. This sector may encounter moderate growth as CPI inflation stabilizes.
The low GDP deflator observed in FY24 has been pivotal in enhancing India's real GDP growth by mitigating the effects of inflation on GDP calculations. However, anticipated shifts in inflation dynamics and input costs could present new challenges for real GDP growth in FY25. It is imperative for policymakers and economists to closely observe these trends to ensure sustained economic growth while effectively managing inflation.
Q1. What is the GDP deflator?
Answer: The GDP deflator is a measure of inflation, calculated as the ratio of nominal GDP to real GDP, reflecting changes in price levels in the economy.
Q2. How does the GDP deflator affect real GDP growth?
Answer: A lower GDP deflator enhances real GDP growth by increasing the inflation-adjusted value of goods and services, making the economy appear stronger.
Q3. What are the main components of the GDP deflator?
Answer: The GDP deflator is primarily composed of the Wholesale Price Index (WPI) and the Consumer Price Index (CPI), weighted approximately 65% and 35%, respectively.
Q4. Why is the RBI's interest rate policy affected by the GDP deflator?
Answer: The RBI's interest rate policy is influenced by its inflation-targeting framework, which focuses on CPI, making it challenging to lower rates despite a low GDP deflator.
Q5. What challenges are anticipated for real GDP growth in FY25?
Answer: Economists expect the GDP deflator to rise in FY25 due to increasing WPI inflation and global commodity prices, potentially impacting real GDP growth negatively.
Question 1: What does the GDP deflator measure?
A) The rate of unemployment
B) The level of inflation
C) Government spending
D) The trade balance
Correct Answer: B
Question 2: Which index has a higher weight in the GDP deflator?
A) Consumer Price Index (CPI)
B) Wholesale Price Index (WPI)
C) Producer Price Index (PPI)
D) None of the above
Correct Answer: B
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