The new methodology to compute India’s GDP numbers is more comprehensive, accurate and in tune with international standards
The Ministry of Statistics came out with India’s GDP growth rate figures for the fiscal year 2013-14. Much to everyone’s surprise, the growth rate came out at 6.9 percent, much higher than the anticipated 4.7 percent. The 2.2 percent difference baffled everyone, including the RBI governor Raghuram Rajan, and the Chief Economic Advisor Arvind Subramaniam. The difference has raised a lot of questions and invited skepticism from both within and outside the government. Business newspapers have claimed that radical changes have been introduced in computing the GDP numbers, which explains the more positive numbers.
The Central Statistical Organization has introduced two big changes in computing GDP numbers: base year revision and using GDP at market prices. Before going into the technical aspects of these two changes, it should be mentioned that neither change is radical. The first of them is the change in base year from 2004-05 to 2011-12. The changing of the base year is a rather routine exercise carried out by the statistical offices around the world. In India, the base year has been changed numerous times and will henceforth be changed once every five years. The other change is the adoption of a universal standard: that of using market prices instead of factor costs to make the GDP computations. This is mainly done to keep India’s numbers comparable with the rest of the world.
BASE YEAR CHANGE
Base year analysis is mainly done to eliminate the effects of inflation and to give a more meaningful picture of the data. GDP measures the sum total of all economic activity within a country. This monetary value is first calculated in nominal terms or at current prices. It is then adjusted for inflation or the changes in the general price level over time and is thus, expressed in terms of the general price level of some reference year, called as the base year. To make this slightly clear, assume that a country is producing only one commodity, say books. So, the GDP of that country would be the total quantity of books produced times the price of the book. Changes in the nominal value of the book over time can happen either due to a change in quantity or a change in prices. Change in real values captures only the change in the quantity of books produced.
Choosing the Base Year: Almost any year can be chosen as the base year, but ideally it should be a recent year to give a more meaningful idea. Since the index number of any series is set to 100 for the base year, it should also be relatively normal. Normal here means the absence of any large aberrations and upheavals in the economy (like extremely high inflation rate or an economy wide downturn).
The base year that was previously used in India was 2004-05. However, since then, there have been significant structural changes to the economy (as in any 10 year period) and a new base year had to be chosen to reflect these changes. The CSO has chosen 2011-12 as the new base year.
GDP AT MARKET PRICES:
The bigger change that has been adopted by the CSO is the change from calculating GDP at factor cost to GDP at market prices. GDP at factor costs is a measure of national income that is based on the cost of factors of production. It is essentially looking from the producers’ side. It does not include the indirect taxes paid by the consumer but includes the subsidies given by the government. GDP at market prices essentially looks at economic activity from the consumers’ angle. It measures GDP at the last step of the transactions, which is the market price paid by the consumer.
It is clearly visible that GDP at market prices is always bound to be higher than GDP at factor cost. Removing subsidies and adding indirect taxes adds a significant part to the GDP numbers (as much as 7% in 2012-13). Thus, moving to GDP at market prices was always bound to give a different number.
Table showing the difference in GDP at factor cost and GDP at market prices (in Rupees trillions)
(Source: RBI Database on Indian Economy)
The Growth rates show a significant discrepancy as well. Look at the difference between the two approaches in 2008-09 and 2010-11.
(Both tables are based on the previous base year 2004-05).
The move to market prices can broadly be seen as a good move in terms of being comparable with world standards. IMF, World Bank and various international databases apart from the statistical organizations in different countries use the market prices measure. Market prices are usually a more comprehensive measure and give a better picture of economic activity. The CSO has also decided to include a range of previously not included sectors and activity. They have covered more sectors, more amount of financial intermediation, revision of labour activities, then also looked into the organized sector and the unorganized sector activity. It has also expanded its coverage of manufacturing and included under-represented sectors and data from the corporate database of the government in arriving at the growth figure. Overall, economists and statisticians would agree that the changes in the data measurement approaches are in a positive direction. A case in point is a statement by former CSO chief Pronob Sen “What has happened when we moved to the new base year is we’ve actually got better data. Basically if you look for instance in the corporate sector, we were earlier going with the RBI forecast and which were based on 2500 corporates. This time around we are using the MCA21data base which is five lakh companies as compared to 2500. So the quality of data has improved”.
However, the skepticism from different corners comes from the fact that the higher GDP growth numbers do not quite tie in well with numbers from other leading indicators of economic activity. For example, Index of Industrial Production numbers are down, so is the rate of gross fixed capital formation (investments). To bridge this gap and understand the discrepancy, we will have to wait a bit longer and wait for the revisions in the data of the other indicators, but for now, there does not seem to be much reason for complaints against this move by the CSO.
 The base years of the National Accounts Statistics series have been shifted from 1948-49 to 1960-61 in August 1967; from 1960-61 to 1970-71 in January 1978; from 1970-71 to 1980-81 in February 1988; and from 1980-81 to 1993-94 in February 1999. Thereafter it was changed to 2004-05 in 2006.
Anupam Manur is a Research Associate at The Takshashila Institution