14-October-2024-Editorial

BASE YEAR REVISION OF INDIA’S GDP

The Ministry of Statistics and Programme Implementation (MoSPI) is currently working on revising the base year for calculating India’s Gross Domestic Product (GDP).

This move comes after the 2015 base year revision, which changed the base year from 2004-05 to 2011-12 and drew criticism over certain methodological flaws.

The ongoing revision aims to address previous concerns and ensure that GDP calculations accurately reflect the country’s current economic landscape.

Previous Base Year Revision Controversies

Several issues have arisen in the past regarding base year revisions. These include:

Methodology Changes:

• The 2015 revision switched to using corporate data from the Ministry of Corporate Affairs (MCA) for the private sector, leaving out traditional sources like the Index of Industrial Production (IIP) and the Annual Survey of Industries (ASI).
• This shift raised questions about the reliability of GDP estimates, particularly in sectors like manufacturing.

Single Deflator Issue:

• India used a single deflator to adjust nominal GDP into real GDP, which is simpler but not ideal.
• Internationally, a double deflation method is preferred, where output prices and input prices are adjusted separately, providing a more accurate measure of value addition.

Discrepancies in GDP Estimates:

• There has been a mismatch between GDP calculated through production methods and expenditure methods, leading to doubts about the accuracy of growth rates.
• Weak consumer spending, despite high GDP growth rates, indicates potential issues with how GDP is measured, especially regarding inflation adjustments.

Under-reporting Data:

• The rapid growth in registered companies, especially in the services sector, poses a challenge as many do not file their financial statements with the Registrar of Companies. This creates gaps in data and may lead to underestimations.

Unorganised Sector Issues:

• The 2015 revision used limited data for the unorganised sector, reducing coverage of informal economic activity, which plays a major role in India’s economy.

Averaging Problems:

• While averaging GDP from the production and expenditure sides is common in developed nations, this practice may not suit a developing economy like India, where data quality and availability vary significantly.

What is a Base Year?

• The base year is a reference year against which future GDP figures are compared to track economic growth over time.
• A base year should be a typical year without major disruptions like natural disasters, financial crises, or policy shocks.

Why Revise the Base Year?

Dynamic Economic Indicators:

• Economic conditions, consumer habits, and production patterns evolve over time. Revising the base year helps ensure GDP figures accurately represent current realities.

Impact on Economic Indicators:

• Changes in GDP calculations can influence other economic metrics such as inflation, government spending, and public debt levels.

International Standards:

• According to the United Nations’ System of National Accounts (SNA) guidelines, countries should update their GDP base year every 5 to 10 years to reflect contemporary economic activities.

History of Base Year Revisions in India

India has revised its GDP base year multiple times. The first revision took place in 1956, with 1949-50 as the reference year. The most recent revision occurred in 2015, changing the base year from 2004-05 to 2011-12. These revisions are necessary to keep GDP calculations aligned with new data sources and methodologies.

Considerations for the New Base Year

Advisory Committee Formation:

• In June 2024, MoSPI formed a 26-member Advisory Committee on National Accounts Statistics (ACNAS) to decide on the next base year.
• The committee will also ensure consistency with other indicators like the Wholesale Price Index (WPI), Consumer Price Index (CPI), and the Index of Industrial Production (IIP).

Potential Base Year Options:

• The committee is considering 2022-23 or 2023-24 as potential base years. Years like 2016 (demonetisation) and 2019-21 (COVID-19) are excluded due to economic anomalies.

Incorporating GST Data:

• One significant improvement could be the inclusion of Goods and Services Tax (GST) data to provide a more comprehensive view of economic activities.

Methodological Enhancements:

• The committee is exploring improved techniques, such as adopting the double deflation method for greater accuracy. New surveys like the Annual Survey of Unincorporated Sector Enterprises (ASUSE) may also be included.

Challenges in Revising the Base Year

Data Gaps:

• Limited or inaccurate data, particularly from the unorganised sector and small enterprises, could affect GDP estimates.

Complexity of Implementation:

• Adopting advanced methodologies like double deflation will require robust data collection systems, which India still lacks in some areas.

Transparency and Credibility:

• Ensuring transparency in the revision process is essential to avoid controversies like those seen in previous revisions.

Conclusion

The revision of India’s GDP base year is a necessary step to ensure accurate economic measurement. By incorporating modern data sets like GST, improving methodologies, and addressing past concerns, MoSPI aims to deliver a transparent, reliable, and updated framework for calculating GDP. The consultation with experts and the formation of an advisory committee show a commitment to enhancing the credibility and accuracy of India’s economic data.