New GDP numbers
There are variations in the ways to calculate GDP and it is the introduction of these new calculations that has caused a spike in India’s recent GDP growth rate, leading to quite a lot of confusion and debate. Earlier, India’s GDP growth rate for the year ending in March 2014 was marked at 4.7%, but with the new calculation methods it has now been revised to be 6.9%. And for the fiscal year ending in March 2015, the earlier estimated GDP that was marked at 5.5% has now increased to 7.4%, a number that closely rivals China’s rate.
How did they arrive at the new numbers?
The changes in the GDP calculation were devised by India’s statisticians working for the Central Statistics Office (CSO) that is under the Ministry of Statistics & Programme Implementation (MOSPI)
There are three important changes made in the calculation of the GDP:
- Changing the base year
- Replacing factor costs with market prices
- Widening of the data pool
Changing the Base Year:
Choosing a base year is the first step while counting the ‘real’ GDP. A real GDP growth rate removes any effects that have arisen due to inflation to give us a truer picture of economic reality. For the revised GDP calculations the Indian statisticians have changed the base year from 2004-05 to 2011-12.
This change alone has played an important part in shooting up the GDP and related numbers. The change in base year is not an unusual phenomena as base year is regularly updated.
Replacing Factor Costs with Market Prices:
There are two ways to calculate GDP and those are calculating via factor costs or calculating via market prices. Until the recent revisions India had used factor costs for calculating GDP but now we have shifted towards market prices. Factor costs means the cost of production that the producers or service providers have incurred after removing the effect of indirect taxes and subsidies.
But by the recent changes we have now shifted towards calculating the GDP by measuring the Gross Value Added (GVA) at market prices. Market prices mean the actual expenditure incurred by consumers. These will also include any subsidies such as food and petrol that are provided to the consumer.
The shift from factor costs to market prices indicates that India is slowly conforming to international norms as most countries use market prices for calculating the GDP.
Widening of Data Pool
In statistics, the larger the sample, the more accurate the extrapolations are, generally speaking. Previous data was sampled from Annual Survey of Industries (ASI), which comprised of about two lakh factories. The new database draws from the five lakh odd companies registered with the Ministry of Corporate Affairs (MCA21). While the earlier data gave only a factory-level picture, the new data looks at the enterprise level.
Does this reflect reality?
A sudden spike in GDP or GDP growth rate has to be understood without resorting to extreme opinions. It doesn’t mean that our economy has overtaken China’s economy in a fortnight and it also doesn’t mean that these numbers are fully misleading. The revisions are not abnormal or unusual practices and can be reasonably argued.
Gross Value Added (GVA) Vs. GDP
Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. Value added represents the contribution of labour and capital to the production process. When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP). Thus, Gross Domestic Product (GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of that economy during the said year after adjusting for taxes and subsidies.
The relationship between GVA at Factor Cost and GVA at Basic Prices and GDP at market prices and GVA at basic prices is shown below:
GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices
GDP at market prices = GVA at basic prices + Product taxes- Product subsidies
Production taxes or production subsidies are paid or received with relation to production and are independent of the volume of actual production.
Some examples of production taxes are land revenues, stamps and registration fees and tax on profession.
Some production subsidies include subsidies to Railways, input subsidies to farmers, subsidies to village and small industries, administrative subsidies to corporations or cooperatives, etc.
Product taxes or subsidies are paid or received on per unit of product. Some examples of product taxes are excise tax, sales tax, service tax and import and export duties.
Product subsidies include food, petroleum and fertilizer subsidies, interest subsidies given to farmers, households, etc. through banks.
In the revised series, as is the practice internationally, industry-wise estimates are presented as Gross Value Added (GVA) at basic prices, while “GDP at market prices” will be referred to as “GDP”. GVA at basic prices can be referred to as GVA at producer price and GDP at market price as GDP at buyer price.