What double deflation is, and why real GDP needs it

Economy No. 27 25 September 2026 · 1 min read

India's new GDP series measures manufacturing and farming with a method called "double deflation". Here it is with a simple example.

Start with gross value added (GVA). It is what a factory sells minus what it buys. This year, it makes 100 units and sells them at ₹10, so ₹1,000. It buys 100 units of raw material at ₹8, so ₹800. Hence, GVA is ₹200.

Next year, it makes 110 units and sells them at ₹11, so ₹1,210. It buys 110 units of material at ₹10, so ₹1,100. GVA is now ₹110, down 45%.

So did the factory shrink? No, in fact, it made 10% more. Only the prices changed. Its selling price went up 10%, but its material got 25% costlier.

Real growth means keeping prices fixed and counting only quantities. Double deflation fixes both prices: what the factory sells at, and what it buys at.

Sales at last year's price: 110 × ₹10 = ₹1,100.

Material at last year's price: 110 × ₹8 = ₹880.

So real GVA is ₹220, up 10% from ₹200. That matches what actually happened.

The old way used only one price for everything, usually the selling price. Take next year's GVA of ₹110 and remove the 10% price rise: ₹110 ÷ 1.10 = ₹100. That says GVA fell 50%, from ₹200 to ₹100. It's wrong because it treats the material as if it got only 10% costlier, when it actually got 25% costlier.

So double deflation matters whenever input prices and selling prices move apart. Hence, nominal GDP growth minus inflation may no longer be a reliable way to get real growth.

How double deflation works, on a made-up example drawn as bars: inputs are the teal part and GVA the gold part left over. GVA, gross value added, is Output − Inputs: the value a business adds to what it buys, and added up across every business it makes most of GDP. Each side is a quantity × a price, so GVA has 4 knobs. In Year 1, output is 100 × ₹10 = ₹1,000 and inputs 100 × ₹8 = ₹800, so GVA is ₹200. Next year, quantity made rises 10% to 110, output price 10% to ₹11, quantity used 10% to 110 and input price 25% to ₹10. Nominal, at new prices: 1,210 − 1,100 = ₹110, down 45%. Real, at Year 1 prices: 110 × ₹10 = 1,100 and 110 × ₹8 = 880, so GVA is ₹220, up 10%. Real growth counts only the 2 quantity knobs.

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