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The Big Picture – Revising GDP calculation: How will it help?

Summary:

The Indian economy which was seen as going through some of the toughest times for the last few years, suddenly looks healthier. The reason for this is the government’s decision to revise the method of calculation and moving the base year from 2005 to 2012. This has resulted in GDP growth which was 4.7% in 2013 14. GDP now looks 6.6% to 6.9%. The revision of current methodology also includes moving from the current factor cost method to market cost method which is practice internationally. Though the revision of methodology has made the economy look healthier many questions have cropped up. The government also introduced the new concepts like Gross Value Added (GVA) to the economy, with the changes aimed at improving the ease of understanding (data) for analysis and facilitate international compatibility.

This revision is a part of regular exercise. Over the time new products enter the market and old products disappear and hence such periodic revisions are necessary. In 2004 the last revision was made. Earlier the revision was carried out every 10 years and the now the decision has been taken to do it every 5 years because after every five years the full survey details of Nation Sample Survey will be made available. This revision also shows to the world that the Indian economy was not as bad as it was being projected in the last few years. Indirect tax section will now be captured in the GDP figure. This would attract more foreign investments.

This revision has made inter temporal comparison difficult. Data comparability and coverage are the issues associated with the new methodology. The quality of the data is also being questioned worldwide now. But the economists say that this is a reliable data. We do not have nation wide employment data. Since the size of the black money has been rising at an unknown rate, the movement from factor cost to market price may not have a greater impact. There are also errors present in the data collection, which are visible in the periodically revised figures.

So far, domestic GDP was calculated at factor or basic cost, which took into account prices of products received by producers. The new formula takes into account market prices paid by consumers. It is calculated by adding GDP at factor price and indirect taxes (minus subsidies). It is in line with international practice and is expected to better capture the changing structure of the Indian economy.

GDP at factor cost= GDP (Market Price) – indirect taxes + subsidies

Data for the new GDP series will now be collected from 5 lakh companies (against 2,500 companies earlier). Under-represented and informal sectors as well as items such as smartphones and LED television sets will now be taken into account to calculate the gross domestic product. The revision in GDP does not alter the size of India’s economy ($1.8 trillion) nor will it alter key ratios such as fiscal deficit, CAD etc. (as percentage of GDP) for 2013-14.