The Central Statistics Office (CSO) recently recalibrated, and in a way downgraded the GDP growth figures for the 2006-2012 UPA era. This was followed by an unprecedented, yet explicable upheaval from the opposition, dubbed as a political conspiracy to discredit the previous government's work ahead of the general elections next year.
Using 2011-12 as the base year instead of 2004-05, the CSO estimated that India's GDP grew by 8.5% in FY10-11 and not by double digit 10.3% as previously estimated. Before we delve into the nuances of a changed base year and the re-calibration methodology, would highly recommend you go through the basics of the very important but much abused metric here.
It is rather common for GDP data to be rebased from time to time. However, the CSO made more fundamental changes in 2015 (“rebasing”; and a move to “market prices”), resulting in a boost to the numbers.
First, the Ministry of Statistics and Programme Implementation (MOPSI) updated the base year from 2004-05 to 2011-12. Why?
GDP is typically measured by reference to the prices and structure of the economy during a particular year – called the base year. Over time the said base year becomes less and less representative of the economy, due to evolution of new methodologies and data sources, new classifications of industry and products, international standards etc. Hence the base year for GDP calculations is updated at regular intervals.
[Listen in from 9:40 onwards to learn more on GDP back-series conundrum]
In India, for instance, base year changes have happened in 1961, 1971, 1981, 1994, 2000, 2005, and 2012.
But, never has a such a debate been incited.
Another change brought about by MOSPI was to revise the method used to measure the output.
According to the new methodology, the GDP will now to be measured by referring to the Gross Value Added (GVA) at market prices, rather than at factor cost.
Under the factor cost method, the GDP constituted of the total value of goods and services produced within the country during a year. Note the focus on value at production.
Factor cost did not account for the value at which goods and services entered the market i.e. what the Government earned in the form of taxes.
The new GDP calculation uses the market price methodology, which hence includes what the government would earn through indirect taxes like sales tax and excise duty; while deducting subsidies.
The updates conducted in 2015 were applied only to figures from 2012/13 onwards i.e. representing a bit of UPA's tenure, but a largely NDA-led period.
Figures from 2006 to 2012, also known as the ‘back-series data’ (largely a UPA-led period) were not updated, barring the efforts of the Mundle Committee.
In August 2018, the Sudipto Mundle Committee on Real Sector Statistics applied the 2015 changes to figures for 2004-2012.
The data released had in fact shown a 30-50 basis points increase in GDP growth figures vs. previously known figures.
For instance, as per the Mundle Committee, the GDP grew by 10.8% in 2010-11 vs. the previously known 9.6%.
This brought some cheer to the opposition.
The numbers did bring some cheer to the Opposition although the government was quick to declare them as "experimental.”
Finally now, the CSO has released the “final” recalculated back-series data going all the way back to 1994-95. This release in contrast showed that India's GDP grew by 8.5% in 2010-11 and not at 10.3% as previously claimed by the Mundle Committee. The Opposition has triggered a no holds barred attack.
Similarly, the 9.3% growth rate each in 2005-06 and 2006-07 were lowered to 7.9% and 8.1% respectively, while 9.8% as earlier estimated for 2007-08 is now 7.7%. This downgrade has invoked a furor against the govt.
The recalculation, on paper, should allow for a like-for-like comparison for the first time. The downgrade though does warrant attention. What factors have driven the reduction for the back-series?
The new GDP computational method decreased the share of wholesale and retail trade (WRT) in GDP, which is directly dependent on employment data, by about 5 ppt (from 16% in the 2004-05 series to 11% for the 2011-12 series).
Inflation (as measured by the GDP deflator) between 2005 to 2012 has also been corrected. The deflator is a weighted combination of the WPI and CPI inflation indices. The two increased at a CAGR rate of 6.4 and 7.9% respectively between FY05 and FY12.
The old GDP deflator had an average inflation rate of 6.7%.
Common criticism has been that this is nothing but technical sophistry being used as an excuse to depress GDP numbers during the UPA era in the run up to the 2019 elections.
There are accusations against the government for tweaking GDP figures based on political considerations.
Critics claim that the back-series data contradicts / conflicts with other economic metrics for the years in question i.e. tax revenues, credit growth, trade performance etc.
One must remember though that GDP is a composite and complex metric, not necessarily having a linear / straight-forward correlation with these metrics. More communication and transparency by the CSO, including a comprehensive disclosure of its methodology, procedures, and adjustments would be most welcome to dispel accusations of institutional compromise. Otherwise in these polarized times, a consensus on this issue appears to be a pipe dream.
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