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Using Generative and Traditional AI for Near Real-Time GDP and Inflation Predictions

Introduction

In the ever-evolving landscape of global economies, India stands out with its meteoric rise and unwavering determination to reach new heights. With a rich cultural heritage and a population exceeding 1.4 billion people, India has emerged as an economic powerhouse, consistently showcasing its prowess on the global stage. The year 2023–24 marks a turning point as India’s GDP surges, solidifying its position as a frontrunner in the global economic race.

The recent article on the government providing price forecasting to neighboring countries (India to offer price forecasting mechanism to neighboring countries | Mint (livemint.com)) reignited my memories of working with the RBI and governments to build a more realtime GDP calculation, we delve into the intricacies of India’s GDP growth, exploring the driving forces behind this remarkable achievement.

Will also shed light on the manual aspects of current GDP calculations, the lag in publishing statistics, and the potential for AI-driven solutions. First how is the GDP calculated?

The Manual Nature of GDP Calculations in India

Two Approaches to GDP Calculation

India calculates its GDP using two primary methods: the factor cost approach and the expenditure approach. Let’s explore these methods and their implications:

1. Factor Cost Approach:

• This method assesses the performance of eight different industries.
• It focuses on economic activity within the country’s boundaries.
• Data points specific to manufacturing, crop yields, and commodities are crucial for this approach.
• However, discrepancies arise due to outdated inflation indices, particularly the Wholesale Price Index (WPI).

2. Expenditure Approach:

• This approach depicts the final use (demand) of the output.
• It considers consumption, investment, government spending, and net exports.
• The challenge lies in aligning expenditure-based estimates with factor cost estimates.

The Discrepancy Dilemma

India’s GDP data has faced scrutiny due to discrepancies between the two calculation methods. Critics argue that the government favors the higher estimate by using a statistical tool called “discrepancy.” This tool bridges the gap between the two approaches but raises questions about accuracy and transparency.

Inflation Indices and Data Quality

1. Wholesale Price Index (WPI):

• The WPI, currently used for inflation calculations, needs an overhaul.
• Experts advocate replacing it with a new Producer Price Index (PPI) that provides more accurate data.
• WPI lacks information on rural-urban dynamics and state-level estimates.

2. Consumer Price Inflation:

• Consumer price inflation varies significantly based on retail and wholesale indices.
• The choice of inflation index affects real GDP calculations.
• India’s inflation indices require updates to ensure reliable estimates.

With a lot of data now available with the government online on manufacturing, data from Online MSP and mandi’s, online marketplaces like Amazon, Google and ONDC, apart from GST transactions being tracked all across, we can now consolidate all this data in one place to get a near real time picture of the economy.

The Lag in Publishing GDP Statistics

1. Quarterly vs. Annual Estimates:

• Quarterly GDP estimates often exhibit higher discrepancies due to limited data availability.
• Annual estimates benefit from more reliable data over time.

2. Data Quality Matters:

• India’s GDP credibility hinges on data quality, which can partially be addressed by going directly to source rather than relying on third party paid agencies who collect this data currently.
• Policymakers must address underlying data issues to enhance reliability.
• Improving the quality of macroeconomic data ensures accurate GDP estimates.

AI Solutions for Real-Time Predictions

Generative AI and Real-Time Monitoring

1. Price Prediction Algorithms:

• Generative AI can scale price prediction models to monitor thousands of products in real time.
• Ranking items by sensitivity and importance alerts economists promptly.

1. Evolving GDP Measurement:

• Services, exports, and GST inputs impact GDP composition.
• Generative AI can incorporate dynamic factors, providing a more accurate representation of the Indian economy.

Citations and References

1. Subramanian, A. (2019). Validating India’s GDP Growth Estimates. Harvard University1
2. Gordon, R. J. (2014). A New Method of Estimating Potential Real GDP Growth. NBER Working Paper №204232
3. InsightsIAS. (2023). India’s GDP Measurement and Its Limitations3

Conclusion

India’s journey toward economic excellence relies on accurate GDP calculations. As we embrace AI-driven solutions, addressing data quality and transparency becomes paramount. By bridging manual gaps and leveraging technology, India can continue its ascent as a global economic powerhouse.

Note: The above article is a synthesis of existing research and insights, with due credit to the cited sources. While thoughts and base articles are original and based on my experiences, GenAI has been leveraged to clean up this article’s language and help make the edits better while automating the citations.