The growth in Nominal GDP, which measures the value of all the goods and services produced expressed in current prices, decelerated to less than half in merely two quarters from 19.3% in Q2 FY09 to 8% in Q4 FY09 respectively (a near 60% drop in 2 quarters), marking its lowest growth in the last 6 years (since Q4 FY03). But the growth in Real Gross Domestic Product, which measures the value of all the goods and services produced expressed in the prices of some base year, fall by merely 25% from 7.7% in Q2 FY09 to 5.8% in Q4 FY09. This aberration can be answered by the growth in GDP Deflator.
The recent figures however depict that even if both the nominal GDP as well as the GDP deflator increases (or declines), but the GDP deflator increases (declines) at a slower rate (more sharply) than the nominal GDP, then the real GDP can record an unexpectedly high growth. Thus while the nominal GDP grew 8% (Y-o-Y) in Q4 FY09, the GDP deflator grew a mere 2.1%, thus helping the real GDP record a good growth rate.
We have calculated the quarterly GDP deflator index by dividing the nominal and real GDP numbers. The GDP deflator grew merely 2.1% Y-o-Y in Q4 FY09, as against 10.72% and 8.06% in Q2 FY09 and Q3 FY09 respectively. On the other hand, the nominal GDP grew merely 8% Y-o-Y in Q4 FY09, as against 19.30% and 14.23% in Q2 FY09 and Q3 FY09 respectively. Thus, while the growth in nominal GDP fell off the precipice in Q4 FY09, the real GDP grew at a rate equal to that in Q3 FY09, due to the steeper decline in the GDP deflator.
Further though the real GDP has shown an unexpected growth the steep fall in nominal GDP is a cause of concern as it may hit the main source of government revenues adding more pressure on fiscal position.
The above diagram clearly shows the relationship between GDP deflator, nominal and real GDP. Even though the nominal GDP has slowed down aggressively the falling GDP deflator has aided the real GDP to record more than expected growth of 5.8% in Q4 FY 09. Thus in reality the GDP deflator has been working as a real GDP inflator.
Even though the difference between the GDP deflator and a price index like CPI/WPI is often relatively small, it has shown some significant differences in few years. As per the data available in FY2001, WPI was 7.2%, while GDP deflator was 3.26%; in FY04, WPI was 5.50%, while GDP deflator was 3.43%; and in FY09, WPI was 8.41%, while GDP deflator was 7.00%. These three years had a common feature of rising crude oil prices and decelerating GDP growth except for FY04, which recorded a growth of 8.5%.
