Base Year Revision for India’s GDP

Context:

Recently, MoSPI pulled together a team of economists and forecasters to deliberate on the issue of revising the base year for estimating GDP for India. This is in fact a demonstration of the firm commitment of MoSPI to broad-based consultation—a necessary expectation, given the controversies generated in the past by revisions of the base year. The last revision, in 2015, to change the base year from 2004-05 to 2011-12, came under methodological attack.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Controversies Surrounding Base Year Revisions in GDP Calculation
2. Understanding the Base Year Concept
3. Reasons for the Update of the Base Year, Methods, and Stages of the Work
4. Conclusion

Controversies Surrounding Base Year Revisions in GDP Calculation

Shift in Methodology

• The previous base year revision involved a significant methodological change where the computation of GDP for the private corporate sector (PCS) was directly sourced from the audited balance sheets from the Ministry of Corporate Affairs (MCA). This method was primarily used for estimating the manufacturing sector’s Gross Value Added (GVA).
• This revision process also phased out the use of traditional data sources like the Index of Industrial Production (IIP) and the Annual Survey of Industries (ASI).

Issues with the Deflator

• Critics have raised concerns about the use of a single deflator for converting nominal GDP growth into real GDP growth. This approach diverges from the double deflation method recognized internationally, which accounts for price changes in both outputs and inputs.
• The single deflator method typically adjusts the nominal value-added in each sector by broad price indices such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI).

Discrepancies in GDP Measurement

• Despite robust reported GDP growth, signs of weak consumption suggest serious measurement discrepancies.
• This weakness in consumption might point to underreported economic activities and could reflect issues in the calculation of inflation within GDP metrics.
• A noted discrepancy exists between the production and expenditure methods of calculating GDP, highlighting potential inconsistencies in data.

Transparency and Coverage Concerns

• The rapid increase in registered companies, especially in the finance sector, over the past three decades has not transparently translated into measurable domestic output. Many of these entities do not file their audited balance sheets with the Registrar of Companies (RoC), obscuring their economic contributions.
• The 2015 revision faced backlash for utilizing balance sheets from the unorganized sector to compute GDP, which generally lacked detailed value-added data from production units. This led to reduced data coverage of informal sector producers, who are often not registered as formal companies.

Methodological Limitations

• The practice of averaging data from production and expenditure sides, while standard in advanced economies, poses challenges in developing contexts like India, where these two aspects of GDP are not independently measured.
• The data quality on the expenditure side, which includes consumption metrics, is considered to be suboptimal.

Understanding the Base Year Concept

Definition of a Base Year

• A base year serves as a specific reference point used to calculate Gross Domestic Product (GDP) figures for both subsequent and previous years.
• It acts as a stable benchmark for assessing economic performance, enabling consistent comparisons over time.
• The chosen base year should be typical, free from atypical events like pandemics or natural disasters, and not be too far removed from the present.

Reasons to Revise the Base Year

• GDP indicators are subject to change due to shifts in consumer behaviors, economic structures, and the types of commodities in use.
• Updates in data compilation methods and the integration of new classification systems necessitate periodic revisions to ensure GDP figures accurately mirror the current economic reality.
• Revisions can affect a wide range of economic indicators and lead to adjustments in recorded GDP levels.

Revision Frequency

• The United Nations System of National Accounts 1993 recommends revising computation practices periodically.
• Ideally, the base year should be updated every 5 to 10 years to align national accounts with the most current data.
• Since 1956, India has revised its base year seven times, with the latest shift from FY 2005 to FY 2012.

Reasons for the Update of the Base Year, Methods, and Stages of the Work

Setting Up the Advisory Committee

• In June 2024, the Ministry of Statistics and Programme Implementation (MoSPI) constituted a 26-member advisory committee on national accounts statistics (ACNAS), chaired by Biswanath Goldar.
• This committee shall determine how GDP measurement will be correlated with measurement of other economic indicators such as Wholesale Price Index (WPI), Consumer Price Index (CPI) and Industrial Production Index (IIP).

Selection of the New Base Year

• The committee is assuming 2022-23 as the new base year for viewing GDP calculations and also considering 2023-24 as an option.
• Such years, which have not been normal for measuring economy; such as 2016 (Demonetization), years 2017-18 (GST exercise – implementation effects) and years 2019-21 (COVID-19 pandemic) are all ruled out.

Incorporating New Data Sources

• A debate is also underway on the applicability of the Goods and Services Tax (GST) revenue streams for the GDP computation to provide a better outlook of the economy.
• Other potential modifications include incorporating the Annual Survey of Unincorporated Sector Enterprises (ASUSE) and the double deflation technique to improve the reliability of GDP figures.

Conclusion

MoSPI’s proactive stance in establishing an advisory committee to oversee the revisions is a reflection of the need for transparency and methodological precision in the computation of GDP. It is expected that these aspects, including bringing in new data sources and improving the calculations, will enhance the quality and credibility of the estimates of GDP of India.

-Source: Business Times