Context: National Statistical Organisation (NSO), the nodal agency responsible for estimating the GDP estimates is considering using GST data for estimating value addition. However, there are concerns about using unverified datasets and methodology for estimating GDP.
About Gross Domestic Product (GDP)
- Most significant measure of a country’s economic size.
- Universal denominator for comparing economic indicators across countries for comparing tax burdens or welfare expenditures.
- For GDP calculation, economic output of all Residents (Includes foreign Residents within India & excludes Indian Citizens outside India.)
- GDP is measured at two prices:
- Nominal GDP: Refers to GDP at current market prices i.e., the GDP is calculated as per the market prices for the year for which the GDP is calculated.
- Real GDP: Refers to GDP at base year prices i.e., GDP is calculated as per market prices in the base year. Thus, the Real GDP negates the inflation in goods and services. After a regular interval of 5-10 years, the GDP base year is revised to update the GDP for changes in relative prices and output basket of the economy.
- In case of high rate of inflation, nominal GDP would be quite higher than real GDP. However, in case of deflation, real GDP would be higher than nominal GDP.
- The current GDP series was last revised in 2015 with 2011-12 as the base year. This GDP series is again due to revision with 2020-21 being proposed as the new base year.
Changes introduced in GDP estimating methodology
In 2015, the Central Statistical Office (CSO) made changes to computing methodology of GDP based upon recommendations of K Sundaram Committee. This has brought India’s methodology in line with international standards of System of National Accounting 2008.
- Change in the base year from 2004-2005 to 2011-2012.
- Change in Default GDP from the GDP at Factor Cost to GDP at Market Prices.
- Sector wise estimates using GVA at Basic Prices i.e., GDP at Factor Cost + Production Taxes – Production Subsidies.
- Calculation of GDP: GVA at basic prices + Product Taxes – Product subsidies.
- Change in database from Annual Survey of Industries (ASI) to MCA-21 database of Ministry of Corporate affairs. MCA-21 database is used for estimating value addition by Private Corporate Sector, which accounts for 38% of GDP.
- Improved coverage of financial corporations through information provided by SEBI, PFRDA, IRDA etc.
MCA-21 Database for GDP estimation
- Before the MCA-21 database being used for GDP estimation, the Annual Survey of Industries (ASI) was used for estimating factory manufacturing value-added.
- RBI’s small sample of large companies with majority paid-up capital of private corporate sector was used to estimate the non-financial corporate sector output.
- Issues with the earlier approach:
- Annual Survey of Industries missed out on value addition outside factory premises in a corporate entity.
- RBI sample was inadequate to account for increasingly important private corporate sector.
- MCA-21 data is obtained from mandatory corporate annual and quarterly filings of corporate results. This database was expected to capture the corporate sector data more effectively.
Issues with the new series
- Some economists have highlighted that these changes have inflated GDP numbers by around 2.5% on account of – Change in default GDP, Presence of shell firms(38%) in MCA database etc. However, Eco Survey 2018-19 has highlighted that these concerns are unfounded.
- The new series of GDP in 2011-12 showed a marginally smaller absolute GDP size and a faster growth rate.
- For the manufacturing sector in 2013-14, the new series showed an annual growth rate of 5.4% as compared to 1.9% using the earlier series.
- Also, the sharp uptick in industrial sector in the new series did not correlate with other aggregates such as bank-credit growth, industrial capacity utilisation.
- Long-term divergence between ASI & National Accounts data: Average annual growth rate of GVA in NAS was 6.2%, while it was only 3.2% in ASI. The deference was much sharper in GFCF: 4.5% by NAS and 0.3% by ASI, respectively.
- This divergence led to scepticism against the new series of GDP estimates. For economists, the principal problem is the untested or unverified nature of MCA-21 database which leads to issues of overestimation of GDP.
Way forward
Thus, there is a need for caution when employing new datasets and methodologies while estimating GDP.
- NSO should first employ pilot studies to validate the suitability of GST datasets for estimating value addition for specific industries, sectors and states. This is essential for confidence and integrity of GDP data.
- NSO can explore reverting to the use of Annual Survey of Industries data as this data is now available with shorter time lag.