7 PM | The problem with re-basing GDP estimates | 13th November, 2019

Context: Base year change and the related issues.

More in news: CSO to change GDP base year to 2017-18 from 2011-12

Gross Domestic Product (GDP):

  • Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
  • As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health.
  • Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well.
  • GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
  • GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights.
  • Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision making.
  • There are several types of GDP measurements:
    • Nominal GDP is the measurement of the raw data.
    • Real GDP takes into account the impact of inflation and allows comparisons of economic output from one year to the next and other comparisons over periods of time.
    • GDP growth rate is the increase in GDP from quarter to quarter.
    • GDP per capita measures GDP per person in the national populace; it is a useful way to compare GDP data between various countries.

Central statistical organization (CSO):

  • The Central statistical organization (CSO) belongs to the Ministry of Statistics and Programme Implementation (MOSPI).
  • It was set up in May 1951 in the Cabinet Secretariat with the primary object of providing technical leader ship in building up the statistical system in the country.
  • The main functions of CSO is to provide advisory services to other statistical agencies, keeping liaison (public relation) with international statistical bodies, preparing and publishing national accounts statistics, industrial statistics, conducting economic census and training statistical personal in official statistics etc.
  • CSO is responsible for the preparation of national accounts, which includes Gross Domestic Product, Government and Private Final Consumption Expenditure, Fixed Capital Formation and other macro-economic aggregates.

The new base year:

  • From January 2015, the Central Statistics Office (CSO) updated base year for GDP calculation to 2011-12, replacing the old series base year of 2004-05, as per the recommendations of the National Statistical Commission.
  • Base year is carefully selected because of the impact it has on the numbers and the year chosen is usually one in which no serious anomaly was present.
  • CSO proposed to replace gross domestic product (GDP) series of 2011-12 base year with a new set of National Accounts using 2017-18 as the base year.

Why is base year changed?

Change of base year to calculate GDP is done in line with the global exercise to capture economic information accurately. Ideally, the base year should be changed after every five years to capture the changing economy.

What is issue with base year as 2017-18?

  • Normally, rebasing is a routine administrative decision of any national statistics office. However these are not normal times for India.
  • There has been a raging controversy over the current GDP figures on account of questionable methodologies and database used.
  • The current method was adopted in 2015 when CSO released a new series of GDP with 2011-12 as base year, replacing the earlier series with the base year 2004-05.
  • The absolute GDP size in the new base year 2011-12 contracted by 2.3% (compared to old series) and the annual GDP growth rate went up sharply from 4.8% in the old series to 6.2% in 2013-14. Such large variation in the growth rate questions the new GDP series.
  • The economic shock particularly after demonetization severely hurt output and employment. For example, the ministry of finance’s report on income tax reforms for building new India, provided data on fixed investment in the private corporate sector based on actual corporate tax returns.
  • It shows that the fixed investment to GDP ratio in the private corporate sector fell sharply from 7.5% in 2015-16 to 2.8% in 2016-17.

The root of the problem:

  • The source of the problem is the underlying methodology for calculating GDP (in the 2011-12 series).
  • Unreliable data: The database of the Ministry of Corporate Affairs has been criticized as unreliable. Since the CSO estimates value addition in private corporate sector using statutory filling of financial results of the ministry, it is possible that the output has been overestimated.
  • State domestic product (SDP): SDP estimation uses many of the same data and methodology. The changes made in 2011-12 base year revision had adversely impacted the quality of SDP estimates.
  • Informal Sector: for estimating value addition by informal or unorganized sector, State-specific labour productivity estimates are unreliable in the 2011-12 series. Hence the method used distorts output estimation.

Conclusion:

The proposed change over to a new base year of 2017-18 is a welcome decision. However, considering the methodological disputes and data related questions, it is required that the above mentioned issues are reviewed and resolved on a prior basis.Source: https://www.thehindu.com/opinion/lead/the-problem-with-re-basing-gdp-estimates/article29956137.ece

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