Debate Persists on India’s Calculation of GDP Data

Calculation of GDP Data

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Debate Persists on India’s Calculation of GDP Data

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RBI governor Raghuram Rajan’s comments made last week once again fueled the debate on the method of calculating India’s gross domestic product (GDP). Rajan voiced the need for a better method of calculation of GDP data to prevent an overlap and to capture the net value addition to the economy. Although Rajan changed his stance a day after, but his comment that the current practice does not adequately reflect value addition in the economy has provided fresh ammunition to critics who view the Narendra Modi government’s claim on growth front as nothing more than just fancy numbers.

Last year, the Modi government changed the methodology for computation of GDP by moving from the factor or basic cost to market prices. The factor or basic cost system takes into account cost of products received by manufacturers, while the market prices factors in what is paid by consumers. In addition, the government had also changed the base year for GDP calculation from 2004-05 to 2011-12, which is a norm every five or six years. Moreover, the news series GDP was to be calculated from 500,000 companies as against 2,500 companies. The rationale given by the Central Statistical Organization was that the new method is in sync with global practices and would give a clear picture of economic activity in the country.


Critics, however, allege that the methodology has been revised to bolster the numbers in the economy. Following the change, the GDP growth for 2014-15 reached 7.3%, putting India at par with China and making it one of the fastest growing in the world. The new data projects Indian economy to be bigger than $2 trillion giving legitimacy to the government’s claims on faster economic growth. The critics keep pointing at disconnect between the rosy GDP numbers and other macro-economic indicators of the economy. They point at highly stressed banking sector and tepid credit growth, sluggish manufacturing growth and corporate earnings. Most importantly, consumer demand, particularly in rural areas, remains poor.

The concerns about the health of Indian economy are true, and to dismiss critics as the detractors of the Modi government would be an oversimplification and missing the big picture.

In the banking sector the total stressed assets (bad and restructured assets) has risen to 12% of the total bank loans. According to the RBI’s financial stability report, gross NPAs of the banking sector could reach 5.4% by September this year from last September’s 5.1%. The lending to industries was measured at 4.6% in October 2015 which fell from 7.8% in October 2014. Likewise, the revival in manufacturing activity remains tepid averaging around 3.9% in November 2015 although it was up from 2.3% in November 2014. A major indicator of rural demand is the sales of two-wheelers which have tumbled.

But, the tendency to view the market prices factor method as gibberish is another Nehruvian extreme that should be out rightly rejected and which continues to shackle many of our institutions and policy-making bodies. If anything, the new method of calculating GDP output is the first step towards syncing Indian economy to market realities.

 Under the new method, India is now measuring GDP as what Indians can consume instead of calculating the resources consumed to produce them. Moreover, the numbers are trustworthy and unlike communist economies devoid of political meddling. A case in point is the Ministry of Statistics last week revising year-over-year growth in India’s output to 7.2% for 2014-15 from the previously calculated 7.3%. The growth for 2013-14 was cut to 6.6% from 69% and the output expanded to 5.6% in 2012-13 from the previously calculated 5.1%. It is possible that these numbers will be further revised as CSO, which is an autonomous body, receives more data.

It is certain that the debate on the methods and numbers will continue in the near future as the government has set up a committee National Statistical Commission chairman Pronab Sen to study the new method. More public discourse on the issue will refine the country’s capabilities to diagnose the health of the economy and consequently, provide best prescription. Nonetheless, the contours of the debate highlight the need for reflection by the Modi government to push more economic reforms and provide enabling governance.

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