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Demystifying India’s new GDP

22 April, 2015

The recent change in the methodology to calculate the country’s gross domestic product (GDP) which catapulted India from a decadal low growth rate to become the world’s fastest growing major economy left many puzzled. Indeed, with no major underlying changes in the real side of the economy, many felt it was a statistical jugglery.

To be sure, there are still various lacunae in the way the economic growth is measured in India but a peek into some of the aspects which explain the jump in output reveals that at least part of it is due to better representation of economic activity in the country. The government’s statistical body CSO released a document last week explaining the new GDP calculations. Here’s what it says and what it misses out.

So what’s different in the new GDP?

One key aspect is the change in base year. Future growth is measured by how the index moves beyond the base year. This needs to be revised periodically to keep national statistics in sync with critical sectors of the economy while weaning out those which have become obsolete or irrelevant in the larger picture.

Besides the shift in base year to 2011-12 from 2004-05, the new series incorporates coverage of activities and of larger dataset and latest international guidelines. This is by far the more important shift.

Nano and Audi won’t be the same!

The new series will report the value added in the economy, moving away from volume-based calculations. In the earlier series, two products falling under a common commodity basket even with different values were equated the same. Hence a Tata Nano, arguably the cheapest brand of cars in the country, and four wheelers sold by luxury automaker Audi were considered as homogeneous commodity. The new series incorporates the higher value added in Audi production.

Look Ma I am also in

Another and easily the biggest change that the new series takes into account is the larger data set—that is, the MCA21 database. MCA21 is the e-governance initiative of the Ministry of Corporate Affairs for filing financial numbers of private corporate sector. While the old series covered just 2,500 companies accounting for their financial results as reported in the RBI study on company finances, the new series based on MCA21 includes 5 lakh companies which constitute 74 per cent of non-financial sector in the country.

This means a massive chunk of Indian corporate sector was not being included in the previous GDP data.

Another change that comes from the MCA21 database is moving away from the establishment approach towards an enterprise approach. The latter accounts for different establishments or entities which come under a single enterprise.

Finance gets a revision

While revised GDP figures primarily focus on the non-financial sector and value added from the unorganised sector, the numbers also account for certain changes in the financial sector and particularly the savings side of the economy.

The revised methodology categorises the entire operation of the RBI as non-market, unlike the previous series where non-market operations were included as part of the general government while the market operation was included in the category of banking and finance.

The new series takes into account the growing financial sector, thereby including NBFCs, cooperative societies and unorganised financial sector. With Indian economy expanding and the government looking at deepening the financial markets beyond banking sector and opening up new channels of credit, the importance of the sector would grow and the new GDP is set to account for such changes.

On the savings side, the new series categorises gold and silver ornaments purchased by households as savings and include them as part of valuables. It has also changed the treatment of savings of non-government and non-financial companies by extracting data for such entities from MCA21 database.

What’s missing and what still doesn’t add up?

While the new series incorporates much of the changes that were required for a fast growing economy, it still leaves some loopholes and some of the figures would need a major revision in the coming years.

The biggest setback with a new series is the non-availability of past economic data to present a better growth rate picture. The series relies heavily on surveys which are conducted once or twice in a decade and are not so accurate as far as the health of the economy is concerned. Also most sectors in the country are informal, a problem which the revised methodology doesn’t address.

This is one reason why the jump in GDP growth numbers do not as much represent the actual rise in economic activity as much as correction in old absolute output data. The real change in growth rate would be captured from the current fiscal.

The report acknowledges as much. It highlights that in the absence of back dated time series, any meaningful analysis of past trends, economic cycles, potential output remains challenging. It is also difficult to estimate at what point of business cycle we are currently operating.

The series also suffers from data lags as MCA21 data are available on an annual basis—that too with a six-nine month lag currently. This is because private firms are not asked to submit data on a quarterly basis. The quarterly estimates for GDP will have to be revised from a volume-based approach to value-added approach. It would need to be imputed.

The heavy reliance on sales and service taxes filings for computation of growth for some sectors would need to undergo a revision as the government moves towards GST next year.

The high frequency macroeconomic data needs to be revised by the government as reliability of GDP data would be based on these indicators.

Another factor is that while the new series takes into account new consumer inflation, it doesn’t use it as a GDP deflator for which it is still reliant on the archaic wholesale price index.

This creates a mismatch for policymakers and analysts alike. RBI had shifted to using consumer prices as a key parameter in deciding monetary policy drift.

The government will release the GDP figures for Jan-March quarter of 2015 on May 29.

(Edited by Joby Puthuparampil Johnson)


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Demystifying India’s new GDP

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