India’s economy grew at 7.3% in 2014-15 by the new formula for calculating GDP, the government said last week. Critics find this hard to swallow. Here’s what the debate is all about.
What is GDP?
Gross domestic product or GDP represents the total value of all the final goods and services that are produced within a country’s borders within a particular time period, typically a year.
What is real and nominal GDP?
It is important to distinguish between nominal GDP and real GDP. Nominal GDP is calculated at current prices and does not factor in inflation. Real GDP is GDP adjusted for inflation.
What is a “base year”?
The base year of the national accounts is the year chosen to enable inter-year comparisons. It is changed periodically to factor in structural changes in the economy and present a more realistic picture of macroeconomic aggregates. The new series changes the base to 2011-12 from 2004-05.
What is the difference between the earlier and new formula for calculating GDP?
Earlier, the index of industrial production (IIP) or factory output served as the primary metric to gauge manufacturing and trading activity. The problem was, it only counted the number of units produced and did not distinguish between say the value of a luxury car and an entry-level hatch-back. It is possible that factory output would have remained stagnant over a period of time, but its value would have multiplied. For instance, you can keep selling the same number of cars, but keep improving the quality so the value goes up.
So, what’s the difference now?
Earlier, organised industrial activity was based on IIP coming in from the Annual Survey of Industries(ASI). This had limitations of capturing goods’ value at the factory gate of firms registered under the Factories Act. Now, the corporate affairs ministry’s MCA21 records, a comprehensive compendium of balance sheet data of about 5,00,000 firms, is used. This captures value added by activities even such as marketing.
Is the difference very high?
Many have pointed out anomalies such as manufacturing showing estimated growth of 7.1% for 2014-15, which under the IIP data for factory output was 2.3%. Though you can justify the divergence theoretically, it is hard to reconcile with ground-level data. According to CSO officials, the divergence is because of the MCA21 records have brought to light a segment of organised activity, which was earlier, for the most part, invisible.
What about calculation of labour income?
Earlier all labour used to be treated equally while in the new series different weights are assigned to owners, hired professionals and helpers.
Value addition in agriculture is now taken beyond farm produce. Livestock data is critical to the new method. Value attached to byproducts of meat including “heads and legs”, “fat” “skin”, “edible offal" and "glands” of cattle, buffalo, sheep, goat and pig.
Does the new data robustly capture the financial sector?
In the earlier series financial corporations in private sector, other than banking and insurance, were limited to a few mutual funds (primarily UTI) and estimates for the non-government, non-banking finance companies as compiled by Reserve Bank of India. In the new series, the coverage of this has been expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies.
How can the economy contract when more data is captured?
India’s new method to calculate gross domestic product(GDP) has marginally reduced the economy’s size by Rs 10,000 crore to Rs 113.45 lakh crore in 2013-14 against Rs 113.55 lakh crore in the old data series. According to the official number crunchers at CSO this anomaly is because of flaws in the earlier data on unorganised trade, which is drawn from the NSSO’s establishment survey. The last such survey was in 2011-12. It was found that the value added in trade in 2011-12 was significantly lower than what CSO had been projecting in the old series.
So, did India grow at 9%-plus or higher earlier?
In the absence of data going back several years, it could be erroneous to fit a trend. As the product basket has changed we can never get the actual production and price numbers. It will have to be an extrapolation which will be statistical in nature. So we will never really know if the old number of 9% plus growth were actually high, higher or lower.
How does the new GDP data factor in the bustling informal economy?
According to officials, the GDP series captures the informal sector well because it takes data from surveys of the household economy. Very few developing countries have this comprehensive group of surveys.