Concerns about using GST data for GDP estimates

Source: The post concerns about using GST data for GDP estimates has been created, based on the article “On the pitfalls of estimating GDP” published in “The Hindu” on 23rd September is 2024

UPSC Syllabus Topic: GS Paper 3- Indian Economy – Issues relating to mobilization of resources.

Context: The article discusses concerns about using GST data for GDP estimates. It warns that untested data, like MCA-21, led to overestimation. The NSO must ensure proper testing of GST data before adopting it to avoid inaccuracies in future GDP calculations.

For detailed information on India’s GST system needs further reform read this article here

What is the Main Concern About GDP Calculation?

1. The main concern is the accuracy of GDP estimates due to untested datasets.
2. The MCA-21 database, used since 2011-12, led to overestimation of industrial growth.
3. For example, in 2013-14, manufacturing growth was revised from (-)1.90% in the old series to (+)5.4% in the new series.
4. Comparisons between NAS (based on MCA-21) and ASI data from 2012-13 to 2019-20 showed significant discrepancies: GVA growth was 6.2% in NAS but only 3.2% in ASI.
5. The same issue occurred with GFCF growth, which was 4.5% in NAS and just 0.3% in ASI.
6. The NSO is considering using GST data for GDP estimation, but experts caution against hasty adoption without proper testing, as seen with MCA-21.

Why Was There a Change in Database Before?

1. The change in database occurred due to limitations in previous methods like the Annual Survey of Industries (ASI) and the RBI sample.
2. ASI missed value addition outside factory premises, while the RBI sample didn’t cover the fast-growing Private Corporate Sector (PCS).
3. MCA-21 was introduced in the 2011-12 base year to capture corporate output more fully.
4. MCA-21, with its extensive corporate returns data, replaced the older methods to provide better coverage.
5. GST data is a large and up-to-date source that may replace the MCA-21 database for estimating value addition in the Private Corporate Sector (PCS), which contributes 38% of GDP. The proposed base year is 2020-21, and using GST data could be a significant change.

What Should be Done?

1. To avoid repeating the overestimation seen with MCA-21 data, the NSO should conduct pilot studies to verify if GST data is reliable.
2. Testing is essential to ensure accuracy in GDP estimates. Cross-validation with other datasets is also important to maintain the integrity of GDP figures.
3. NSO could consider reverting to the Annual Survey of Industries (ASI) for estimating GDP in the manufacturing sector, as it is now available with a shorter time lag.

Question for practice:

Examine the potential risks of using GST data for GDP estimation based on past issues with untested datasets like MCA-21.