ECONOMIC NOTES

EPW Research Foundation

Gross Value Added

Why Not the Double Deflation Method
for Estimation?
J Dennis Rajakumar, S L Shetty

To estimate gross value added

for the manufacturing sector,
the 201112 National Accounts
Statistics series follows the
single deflation instead of the
double deflation method. In this
note, it is argued that the double
deflation method estimates come
closer to the Index of Industrial
Production growth estimates,
and that this reinforces the
view that gross value added of
manufacturing is overestimated
in the 201112 series. This has an
impact on overall GDP growth
numbers, which too end up lower
than in the new series.

J Dennis Rajakumar (dennisraja@epwrf.in) is

Director and S L Shetty (slshetty@vsnl.com) is
Advisor, EPW Research Foundation, Mumbai.

78

ccording to the new series of

National Accounts Statistics
(NAS) 201112 series, released by
the Central Statistics Office (CSO 2015a),
the manufacturing sector has registered
higher growth6.2% in 201213 and
5.3% in 201314in contrast to the low
growth of 1.1% in 201213 and -0.7% in
201314, respectively, in the old 200405
series.1 In the compilation of manufacturing data in the new series, a major
change has been introduced; the erstwhile establishment approach has been
replaced by the enterprise approach.
The CSO has done this by using new data
sources such as MCA-21 and has enlarged
the coverage of activities that were
hitherto not included under manufacturing (CSO 2015b: 7374).2 These
changes would have undeniably had an
impact on the volume of manufacturing
output and gross value added (GVA). In
an earlier note (Rajakumar 2015), we
had shown how the method of estimation of manufacturing GVA of the private
corporate sector was not entirely convincing. The CSO erred in not separating
non-government public limited companies from other non-government companies at the compilation level, and instead
used aggregate paid-up capital to scale
up the sample of companies to account
for uncovered corporate entities. In this
note, we attempt to relook at the growth
of manufacturing GVA by applying the
double deflation method in place of the
single deflation method, which the CSO
continues to rely upon for estimating
manufacturing GVA at constant prices.
Under the single deflation method, a
sectors current output and inputs are
both deflated by a common deflator.
The double deflation procedure implies
that output and input prices behave

differently and so a sectors current output and inputs are to be suitably adjusted
for their respective price movements in
order to arrive at the GVA of that sector
at constant prices. Except for estimating
constant price GVA for agriculture, the
CSO continues to follow the single deflation method for several other sectors in
the new series.3
The CSO in the new series of NAS
provides the value of output and intermediate consumption, both at current
and constant prices, for all 11 major sectors, including manufacturing. Using
this information, this note aims to
estimate the GVA of the manufacturing
sector, but by following the double
deflation method. While the implicit
output deflator under the new series
can be directly used for deflating value
of output, there is no input price index
per se. So we independently construct
an index of input prices based on the
information available in the latest available inputoutput tables for 200708
(CSO 2012b).4
Input Intensity: A Backdrop
We have examined input intensity, that
is, value of intermediate consumption
to output, for various years for which
inputoutput tables are available (Table 1,
p 79). Intermediate consumption used to
be in the order of 36.8% of total domestic output in the economy in 196869,
and went up to 50.7% in 200708. A
steady increase in the percentage share
of intermediate consumption in total
output has thus been noticed throughout, except in the 1990s. In 200708,
intermediate consumption (input) items
comprised commodities and services
that accounted for 40.7% and 10% of
total output respectively. As a percentage of output, both commodities and
services inputs have been rising over
the years.
To extend the above results, we have
used the information given in the new
series to work out intermediate consumption as a percentage of total output
for 11 sectors for three years starting
from 201112 (Table 2, p 79). At the
aggregate level, intermediate consumption

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ECONOMIC NOTES

EPW Research Foundation

accounts for 56.2% of total output in the

economy in 201112, and this has marginally come down to 54% in 201314.
Though a declining trend is noticed in
recent years, intermediate consumption
constitutes more than half of total output, and when compared with the past
(Table 1), the input intensity has
remained high. Input intensity of manufacturing was much higher at 79.5% in
201112, and thereafter it has declined
only marginally to 77.8% in 201314.
Table 1: Intermediate Consumption as
Percentage of Output
Year

Intermediate
Consumption
(1+2)

Commodities

Services

(1)

(2)

36.8
37.6
42.4
44
46.1
44.7
44.4
48.4
50.7
(60.6)

30.5
31.2
33.7
35.5
37.9
35.6
34.5
37.8
40.7
(50.0)

6.3
6.4
8.7
8.5
8.2
9.1
9.9
10.6
10
(10.6)

196869
197374
197879
198384
198990
199394
199899
200304
200708

Construction of Input Price Index

The inputoutput table 200708 has an
input flow (absorption) matrix (commodities by industry) which helps discern how much output of an industry
has been used as input by various sectors in the economy. This information
has been given for 130 sectors, both
commodity-producing and servicesproviding. Using this absorption matrix,
we have identified the manufacturing
sectors consumption of intermediate
inputs. There were 106 commodity
inputs used by manufacturing, which
together accounted for 67.1% of total
inputs consumed by the sector in 200708
(Table 3). This constituted 43% of the

share. On the whole, the manufacturing

sectors consumption accounted for
42.5% of total intermediate input.
Though it is desirable to arrive at a composite input price index taking into

Table 3: Inputs Absorption by Manufacturing

9
10
11
12
13
14
15
16
17
18

Input

Number of
Commodities
Items
Included

As % of
Total
Inputs

As % of
Economy-wide
Respective
Inputs

106
1
1
22
130

67.1
15.4
0.03
17.5
100.0

43.0
47.1
9.0
37.8
42.5

1 Commodities
2 Construction
3 Water supply
4 Services
Total

Figures within brackets pertain to manufacturing sector.

Source: CSO (2012b: 24). For manufacturing, authors estimates are
based on data extracted from CSO (2012b: 65108).

Source: Authors estimates based on data extracted from CSO (2012b:

65108).

In fact, the CSO cites the high input

intensity of the manufacturing sector as
a chief reason for not applying the double deflation method to estimate the
sectors GVA at constant prices. It opines
that any unfavourable movement in
input prices could lead to considerable
reduction in GVA (CSO 2012a: 12728).

total consumption of commodity inputs

in the economy as a whole in the same
year. Thus, intermediate consumption of
the manufacturing sector is relatively
more commodity intensive. The 22 services rendering sectors accounted for
17.5% of total inputs for the manufacturing sector, which represented 37.8% of

Table 2: Intermediate Consumption as a Percentage of Output in the NAS 201112 Series

Economic Activity
201112

1
2
3
4
5
6
7
8
9
10
11

Agriculture, forestry and fishing

Mining and quarrying
Manufacturing
Electricity, etc
Construction
Trade, etc
Transport, etc
Financial services
Real estate, etc
Public administration and defence
Other services
Total

22.9
40.8
79.5
77.4
64.5
33.0
57.8
26.2
23.8
27.0
30.4
56.2

At Constant Prices
201213
201314

23.4
42.5
77.9
78.5
64.5
32.3
56.9
25.8
23.1
24.2
30.4
54.6

23.6
43.0
77.8
78.2
64.3
31.6
56.6
25.2
23.4
15.3
30.2
53.7

201112

At Current Prices
201213

201314

22.9
40.8
79.5
77.4
64.5
33.0
57.8
26.2
23.8
27.0
30.4
56.2

22.8
42.7
77.8
77.5
64.6
31.9
56.8
25.8
23.3
24.7
30.3
54.6

22.7
42.4
77.6
77.5
64.5
31.9
55.8
25.2
23.7
16.0
30.1
54.0

Electricity, etc consist of: Electricity, gas, water supply and other utility services;
Trade, etc: Trade, repair, hotels and restaurants;
Transport, etc: Transport, storage, communication and services related to broadcasting;
Real estate, etc: Real estate, ownership of dwelling and professional services.
Source: Authors estimates based on data extracted from CSO (2015a).

No doubt, given this magnitude of input

intensity, the GVA in real terms would be
sensitive to the prevailing output and
input prices.
Economic & Political Weekly

EPW

august 15, 2015

total services consumed in the whole

economy. Of the remaining two, construction accounted for 15.4% of total
inputs, and water supply had a meagre
vol l no 33

Table 4: Weights Derived for WPI Commodities

Group
Commodities Group

1
2
3
4
5
6
7
8

Number of
Weights
Commodities
Items Included

Food articles
16
Non-food articles
10
Minerals
9
Coal
1
Mineral oils
3
Electricity
1
Food products
6
Beverages, tobacco and
tobacco products
2
Textiles
9
Wood and wood products
2
Paper and paper products
2
Leather and leather products
2
Rubber and plastic products
2
Chemicals and chemical products
9
Non-metallic mineral products
3
Basic metals, alloys and metal products 7
Machinery and machine tools
15
Transport, equipment and parts
7
Total
106

3.828
1.249
0.690
0.404
2.381
1.809
3.271
1.350
8.587
0.899
2.651
0.976
4.352
12.676
2.893
21.581
19.548
10.857
100

Source: Authors estimates based on data extracted from CSO (2012b:

65108).

account these varied inputs (of both

commodities and services), we have
used only commodities inputs for the
purpose of the exercise aimed in this
note, as they cover the bulk of inputs.
Having first identified the individual
commodity inputs consumed by manufacturing using the inputoutput table
200708, we clubbed them according to
the relevant commodity groups comprising the wholesale price index (WPI series
200405). The relative WPI weights for
input items falling under each of the WPI
groups, 106 commodity inputs, have
been presented in Table 4. Groups such

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as chemical products, metal products,

machineries, and automotives and
transport equipment have constituted
64.7% of total commodity inputs used by
the manufacturing sector in 200708.
The respective shares of various commodity groups have been used as
weights for their corresponding commodity groups of WPI to arrive at a composite input price index. The WPI series
of 200405 was indexed to 201112, the
base year of the new series of NAS, using
the splicing method.
Relative Price Movements
Taking directly the output deflator
obtained in the new series of NAS, we
have juxtaposed it against our estimates
of the input price index (Table 5). The
ratio of index of commodities input prices
to implicit output deflator, representing
relative price movements, shows a slight
downward trend in the last three years
from 100 in 201112 to 99.2 in 201314.
This suggests that manufacturers have
to pay relatively lower price for inputs,

compared to the price they received

for output.
Growth under Double Deflation
We have taken manufacturing output
at constant prices directly from the
new series of NAS. We have taken the
intermediate consumption of manufacturing sector at current prices from
the same source and this was deflated
Table 5: Relative Price Movements
Years

201112
201213
201314

Index of
Input Prices
(1)

Implicit-output
Deflator
(2)

Relative
Price
(1)/(2)*100

100.0
105.6
109.4

100.0
105.7
110.3

100.0
99.9
99.2

Source: Authors estimates.

using the input price index constructed

separately by us. The real GVA was
worked out by subtracting the value of
intermediate consumption at constant
prices from the value of deflated output.
In Table 6 (p 81), we have presented
output, intermediate consumption and
GVA of manufacturing sector from 2011
12 to 201314, and their respective

growth by following the methods of

double deflation (worked out by us) and
single deflation (as per the new series
of NAS).
The growth rate of manufacturing
GVA based on the double deflation procedure is found to be lower than that estimated using the single deflation method.
While manufacturing growth rate under
double deflation is one percentage point
less in 201213, it is 3.3 percentage
points lower in 201314 than that
reported by the CSO, which followed the
single deflation method.
If the manufacturing GVA under double deflation is accepted, then the economy-wide GVA at constant prices
would be lower by Rs 14,159 crore (or
0.16% of total GVA) in 201213, and by
Rs 66,753 crore (or 0.73% of overall
GVA) in 201314. Thus, when the double
deflation procedure is followed, not
only does the size of manufacturing GVA
come down, but so does the rate at
which it is growing. Using the double
deflation method shows a downward

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201213 and 201314 as well. The RBI

reports GVA growth rates based on current prices, so we have adjusted them by
subtracting the growth rate of the
implicit GVA deflator worked out under
both single deflation (Real-SD) and double deflation (Real-DD) method.
As seen in Table 7, the real growth
rate of GVA of these 2,879 manufacturing companies, using the implicit deflator of the double deflation method, is
abysmally low at 0.6% in 201213 and
even negative at (-)1.8% in 201314. This
is once again in line with what has been
observed for economy-wide manufacturing GVA under double deflation presented in Table 6, and is also close to
what has been revealed by manufacturing IIP. This new evidence reinforces the
hypothesis that the high manufacturing
growth revealed by the new series of
NAS is not tenable.
We further consider profitability of
these 2,879 manufacturing companies
in the RBI studies. As shown in Table 8,
the profit margin of these companies
shows a continuous fall. Gross profit as a
percentage of sales declined from 10.3%
in 201112 to 9.5% in 201314. Moreover,
the growth rate of profit before and after

revision in the overall growth of the

economy.
Moreover, the intermediate consumption to output ratio of the manufacturing sector under the single deflation
method shows a steady decline, implying more efficient use of inputs. In sharp
contrast to this, this ratio under the
double deflation method is observed to
have gone up in 201314, compared to
201213, which means less efficiency in
input use.
Corroborating with RBI Studies
The observed subdued growth of manufacturing is by and large in line with the
sluggish growth registered by the manufacturing component of the Index of
Industrial Production (IIP, base year
200405), which remained at 1.3% in
201213 and negative at (-)0.8% in
201314 (Table 7). Further, we have
compared our estimates with the
growth rate of GVA of 2,879 manufacturing companies included in the regular company finance studies of the
Reserve Bank of India (RBI).5 The RBI
provides data for the preceding two
years, and so growth rates of these
common companies are available for

At Constant Price (Rs crore)

Output
Intermediate
GVA
Consumption

Our estimates (double deflation method)

201112
72,17,642
201213
70,88,458
201314
73,89,934
As per CSO (single deflation method)
201112
72,17,642
201213
70,88,458
201314
73,89,934

Growth Rate (%)

Intermediate Implicit
Output Intermediate GVA Consumption Deflator
Consumption
as % of Output

57,35,484
55,28,146
57,98,511

14,82,158
15,60,312
15,91,423

-1.8
4.3

-3.6
4.9

5.3
2.0

79.5
78.0
78.5

100.0
106.0
113.6

57,35,484
55,13,987
57,31,758

14,82,158
15,74,471
16,58,176

-1.8
4.3

-3.9
3.9

6.2
5.3

79.5
77.8
77.6

100.0
105.1
109.1

Table 7 : Growth Rates of Manufacturing: RBI Sample and IIP

Years

201213
201314

Growth Rate of GVA Deflator

SD

DD

5.1
3.8

6.0
7.2

GVA of RBI 's Sample of 2,879

Manufacturing Companies
Nominal
Real-SD
Real-DD

6.6
5.4

1.5
1.6

0.6
-1.8

IIP-Manufacturing

1.3
-0.8

Notes
1

In terms of its relative share in total GVA,

manufacturing sector accounted for 17.9% in
201213 and 17.3% in 201314 compared to
14.1% and 12.9%, respectively, in the 200405
series. The estimates are based on gross value
added (GVA) at basic price for new series,
whereas GDP at factor cost for the old series.
For instance, several activities like trading and services of the head office rendered outside the surveyed establishment (factory) are now covered.
For details of the method of sector-wise estimation of GVA at current and constant prices, and
assumptions made thereon, see Table 6.1 of
CSO (2015b, pp 13675).
In the past, the issue of double deflation has
been widely debated following the work of
Balakrishnan and Pushpangadan (1994). They
used inputoutput tables for 197374 and
198384.
This is part of the RBI studies of finances of
4,388 non-government non-financial public
limited companies for 201314, which together
accounted for 32% of paid-up capital of the
same segment (Reserve Bank of India Bulletin,
April 2015).

References

Table 6: A Comparison of Manufacturing GVA Growth Rates Estimated Using Double and Single
Deflation Procedures
Years

tax of these manufacturing companies

remained negative at (-)4.1% and
(-)7.9%, respectively, in 201314. Further, the gross fixed assets growth
dipped from 12.5% in 201213 to 9.3% in
201314. This evidence further corroborates our earlier finding that there are
misgivings regarding the high growth
estimated in manufacturing GVA in the
201112 NAS series.

ManufacturingNAS (Old 200405

Series)

1.1
-0.7

Balakrishnan, P and K Pushpangadan (1994):

Total Factor-Productivity Growth in Manufacturing Industry: A Fresh Look, Economic &
Political Weekly, Vol 29, No 31, 30 July.
CSO (2012a): National Accounts Statistics Sources
and Method 2012, New Delhi: Ministry of Statistics and Programme Implementation.
(2012b): InputOutput Table 200708, New
Delhi: Ministry of Statistics and Programme
Implementation.
(2015a): New Series Estimates of National
Income, Consumption Expenditure, Saving
and Capital Formation (Base Year 201112),
press note, 30 January.
(2015b): Changes in Methodology and Data
Sources in the New Series of National Accounts
Base Year 201112, New Delhi: Ministry of Statistics and Programme Implementation.
Rajakumar, J D (2015): Private Corporate Sector
in New NAS Series: Need for a Fresh Look,
Economic & Political Weekly, Vol 50, No 29,
18 July.

Real-SD and Real-DD is nominal growth rate minus growth rate of implicit GVA deflator using single deflation (SD) and double deflation (DD)
method, respectively.
Source: Authors estimates based on data extracted from Reserve Bank of India Bulletin, April 2015.

available at

Table 8: Profitability of 2,879 Manufacturing Companies

Years

201112
201213
201314

EBITDA

As % of Sales
Gross Profit (EBIT)

Profit after Tax

11.8
11.2
10.9

10.3
9.7
9.5

5.5
5.1
4.5

Growth Rate in Nominal Values

Profit before Tax
Profit after Tax Gross Fixed Assets

1.8
-4.1

EBITDA is earning before interest, taxes and depreciation; PAT is profit after tax and PBT is profit before tax.
Source: Reserve Bank of India Bulletin, April 2015.
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2.0
-7.9

12.5
9.3

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