New method for GDP calculation : Reform or Bluff?

anant

Indian government has revised the method for GDP calculations. According to recently released estimates based on this new method, India has become the fastest growing large economy overtaking China. GDP growth rate has been revised to 6.9% for 2013-14 and expectation of this year has been revised to 7.4%. The chief statistician claims that this method is closer to the International standards compared to the previous one.

India now measures GDP by market prices instead of factor costs, to take into account gross value addition in goods and services as well as indirect taxes. The base year has been shifted to 2011/12 from 2004/05 earlier.

While there has been no visible change in the economic conditions, this sudden change has brought a statistical turnaround for Indian economy. Is this a much needed reform or some jingoistic measure? It cant be a "chest thumping" measure just to confuse the vote bank, can it?

anant

Any experts in economics/speculators/conspiracy theory buffs here? Can someone explain or give their opinion on what is happening?

aamengineer

yes @Thor and @other experts in economics, please explain above.

anant

While there has been no visible change in the economic conditions, this sudden change has brought a statistical turnaround for Indian economy. Is this a much needed reform or some jingoistic measure? It cant be a "chest thumping" measure just to confuse the vote bank, can it?

CSO has said that the new method is closer to the international standards. We'll have to wait till some experts elicit their opinion about the new method.

This change is certainly not a "Chest Thumping" or jingoistic measure. The decision to change the base year was taken somewhere in July 2012, and present Government has nothing to do with it.

http://archive.indianexpress.com/news/gdp-base-year-to-be-revised-to-201112/976806/

Yes, the CSO has said that but how come all international bodies like IMF, World Bank etc used to be in sync with the old method? I also read some international articles which sounded sceptical. I guess only time will tell.

crux

Yes the decision to revise the base year cant be taken as a reform, it was meant to happen.
But calculating GDP at Market cost will now give us a more realistic picture of our economy. Also, we will have more internationally comparable figures available(as developed economies cal it at Market cost).
Moreover, coverage of GDP has been increased by inducting new products(esp from IT sector). Thus, it will give us more comprehensive data on industry.

One down side is that until the previous data is recalculated/adjusted acc. to the new base year inter-temporal comparisions will be difficult to make. This will take some time.

^ from rstv notes (:

woman

Indian government has revised the method for GDP calculations. According to recently released estimates based on this new method, India has become the fastest growing large economy overtaking China. GDP growth rate has been revised to 6.9% for 2013-14 and expectation of this year has been revised to 7.4%. The chief statistician claims that this method is closer to the International standards compared to the previous one.

India now measures GDP by market prices instead of factor costs, to take into account gross value addition in goods and services as well as indirect taxes. The base year has been shifted to 2011/12 from 2004/05 earlier.

While there has been no visible change in the economic conditions, this sudden change has brought a statistical turnaround for Indian economy. Is this a much needed reform or some jingoistic measure? It cant be a "chest thumping" measure just to confuse the vote bank, can it?

This is just a new way to calculate the numbers, nothing more and nothing less. Countries can change the way they do national accounting whenever they wish to. Unless there is a hint of deliberate manipulation, these numbers are accepted by international bodies.

Whenever countries change the base year, the numbers change and with that the GDP growth rate. So, numbers very close to base years are always seen with a cautious eye. But since the base is 2011-2012, current year GDP growth is very legitimate. It differs from the earlier projected number because the structure of the economy has changed. This is no manipulation.

To look at it, one can say that we were calculating our GDP numbers in an outdated way. Now, its in line with the current structure.

anant

Yes the decision to revise the base year cant be taken as a reform, it was meant to happen.
But calculating GDP at Market cost will now give us a more realistic picture of our economy. Also, we will have more internationally comparable figures available(as developed economies cal it at Market cost).
Moreover, coverage of GDP has been increased by inducting new products(esp from IT sector). Thus, it will give us more comprehensive data on industry.

One down side is that until the previous data is recalculated/adjusted acc. to the new base year inter-temporal comparisions will be difficult to make. This will take some time.

^ from rstv notes (:

Another downside I see is that while developed countries do calculate their GDP at market costs, they are only able to do so because they have a low and stable inflation rate. When you calculate GDP at market costs, inflation gets factored in the calculation. That is to say a country would show an increased GDP growth rate just because of inflation even if its production/output remains stagnant.

India has highly unpredictable and high rates of inflation. Yet, we have opted to calculate GDP at market prices. In such cases, wont it be better to have revised the base year but let the calculations be based on factor costs? This was my initial problem to begin with. I understand how changing the base year affects the calculation of any parameter. My doubts were about the use of market prices instead of factor costs.

MD47

@anant
I'm also not able to understand the benefits of GDP@MP
@Thor......please throw some light on this
TIA

woman

Yes the decision to revise the base year cant be taken as a reform, it was meant to happen.
But calculating GDP at Market cost will now give us a more realistic picture of our economy. Also, we will have more internationally comparable figures available(as developed economies cal it at Market cost).
Moreover, coverage of GDP has been increased by inducting new products(esp from IT sector). Thus, it will give us more comprehensive data on industry.

One down side is that until the previous data is recalculated/adjusted acc. to the new base year inter-temporal comparisions will be difficult to make. This will take some time.

^ from rstv notes (:

Another downside I see is that while developed countries do calculate their GDP at market costs, they are only able to do so because they have a low and stable inflation rate. When you calculate GDP at market costs, inflation gets factored in the calculation. That is to say a country would show an increased GDP growth rate just because of inflation even if its production/output remains stagnant.

India has highly unpredictable and high rates of inflation. Yet, we have opted to calculate GDP at market prices. In such cases, wont it be better to have revised the base year but let the calculations be based on factor costs? This was my initial problem to begin with. I understand how changing the base year affects the calculation of any parameter. My doubts were about the use of market prices instead of factor costs.

Inflation is taken out using a GDP deflator, just like when using factor costs.

scorpio50

http://mospi.nic.in/Mospi_New/upload/nad_press_release_30jan15.pdf

Hidden in this press release , is the evidence of why our GDP growth rate slowed in the UPA era.

15. Gross Capital Formation (GCF) at current and constant prices is estimated by two
approaches – (i) through flow of funds, derived as Gross Saving plus net capital inflow from
abroad; and (ii) by the commodity flow approach, derived by the type of assets. The estimates of
GCF through the flow of funds approach are treated as the firmer estimates, and the difference
between the two approaches is taken as “errors and omissions”. However, GCF by industry of use
and by institutional sectors does not include “valuables”, and therefore, these estimates are lower
than the estimates available from commodity flow.
16. Gross Capital Formation (GCF) at current prices is estimated as Rs. 33.7 lakh crore for the
year 2011-12, while the estimates for both the years 2012-13 and 2013-14 stand at Rs. 36.6 lakh
crore. Since GCF did not increase during 2013-14, the rate to GDP declined during the year to 32.3
percent as against 36.6 during 2012-13. The rate of GCF to GDP excluding valuables stands at 33.9
percent and 31 percent during 2012-13 and 2013-14 respectively. The rate of capital formation in
the years 2011-12 to 2013-14 has been higher than the rate of saving because of net capital inflow
from Rest of the World (ROW).
17. In terms of the share to the total GCF (at current prices), the highest contributor is Non-
Financial Corporations, with the share rising steadily from 46.6 percent in 2011-12 to 51.5 percent
in 2013-14. Share of household sector in GCF is also significant, which has declined from 42
percent in 2011-12 to 34.2 percent in 2013-14. The share of General Government in GCF has
increased from 10 percent in 2011-12 to 13.2 percent in 2013-14.
18. The rate of Gross Capital Formation at constant (2011-12) prices has decreased from 37.2 in
2012-13 to 33.4 in 2013-14.
19. Within the Gross Capital Formation at current prices, the Gross Fixed Capital Formation
(GFCF) amounted to Rs. 33.7 lakh crore in 2013-14 as against Rs. 31.4 lakh crore and Rs. 29.7
lakh crore in 2012-13 and 2011-12 respectively. The change in stocks of inventories, at current
prices, decreased from Rs. 2.2 lakh crore in 2011-12 to Rs. 1.8 lakh crore in 2013-14, while the
valuables decreased from Rs. 2.5 lakh crore in 2011-12 to Rs. 1.5 lakh crore in 2013-14.

What this basically shows is that overall capital formation reduced as a proportion of GDP from 2011 to 2014. And the reduction was largely due to reduction in household capital formation and corporate capital formation . The government capital formation however increased ...

further from tables it is evident that industry ,mining and construction activity stagnated or even declined..

this is the incriminating evidence of the inertia put by the UPA 2 ..The billions of dollars of projects that did not get cleared (jayanthi , raga whoever) and poor governance in general...

whatever growth that took place was largely due to increase in consumption , which was probably driven by infusion of liquidity directly to the market .(nrega etc) this partly explains the inflation...liquidity driven expenditure couple with supply side bottlenecks...

the gross parameters that we need to follow when monitoring Modi government besides the growth rate are various capital formation and savings ratios ..

scorpio50

And as was mentioned by our chief statistician in interview to Business Standard, data from various sources like Insurance (IRDA), Stock market(SEBI) and pension has been included which was not developed to international standard at the time of 2004-05 series.