Experts weigh in on criticism of GDP methodology

Source: The post is based on the article “Experts weigh in on criticism of GDP methodology” published in Business Standard on 27^th September 2023.

Syllabus: GS 3 – Indian Economy – Growth & Development

Relevance: Flaws in India’s GDP calculation method.

News: Critics have pointed out flaws in India’s GDP calculation method since the 2011-12 base year revision from 2004-05. This article examines three experts’ views to understand the methodology amid these criticisms.

Why are critics highlighting GDP methodology issues after the shift to the 2011-12 base year, even though discrepancies on the expenditure side and deflator issues existed in the 2004-05 series?

First, the old GDP method employed physical indices, capturing real GDP effectively, while the new approach relies on price indices, better suited for nominal GDP.

In the past, numbers were inflated for nominal GDP, while the new method deflates them for real GDP. However, categorizing GDP for multiproduct firms is challenging in the new method.

Second, In India, production side GDP estimates are seen as the most comprehensive, while discrepancies are noted on the expenditure side. Hence, to mitigate discrepancies, supply-use tables (SUTs) can be employed.

Third, critics’ concerns seem unusual since the current GDP series is over 12 years old. The main issue should be updating the base year with recent indicators.

Should India consider Ashoka Mody’s suggestion to average GDP growth rates from both production and expenditure sides without discrepancies, even though it hasn’t done this previously?

First, unlike advanced countries like the US, India doesn’t measure both sides of GDP independently, so averaging both sides isn’t relevant for India.

Second, averaging across production and expenditure estimates is not a viable option and proper reference should be given from the UN System of National Accounts that permit such calculations.

Third, India has adopted the new system of national accounts, valuing GVA at basic prices and GDP at market prices.

Most sectors in India use the production approach for GDP calculation, but some rely on the income approach due to data challenges. Hence, balancing these methods can reveal discrepancies.

Did India’s switch from factor cost to market prices as the GDP calculation methodology in the 2011-12 series represent a more suitable approach?

First, GDP was previously calculated at market prices, and GDP at factor cost is essentially GVA at basic prices, with minor differences related to taxes.

Second, India has always reported GDP at market prices. In the 2011-12 series, it introduced GVA at basic prices, aligning with international standards, by separating production taxes and subsidies from other taxes and subsidies.

Further, GVA at factor cost includes taxes and subsidies not directly related to production.

Third, it is difficult to say which measure of GDP is better as India adopted the new system of using GVA at market prices to conform to international standards.

Does the government claim that it first calculates real GDP in quarterly figures, suggesting that deflators’ impact may be reduced?

First, the government calculates GDP using a mix of nominal prices and real prices, because the data that is available for different sectors is not always consistent.

Second, quarterly GDP is difficult to calculate because not all data is available for every quarter. The government uses a method called the Benchmark Indicator Method to project the missing data.

This is primarily done for estimates at constant prices, which are then deflated to get current price estimates.

Third, India has faced difficulties calculating GDP accurately due to problems with deflators. In the past, India used the WPI to measure inflation, but the rural and urban CPI is a better measure of inflation for households.

However, the WPI is still used most for measuring GDP, which means some of the problems with deflators will remain.

Should the Centre fix the gaps in GDP calculation when it revises the base year from 2011-12?

First, the UN-prescribed method for GDP calculation uses SUTs, which are time-consuming to produce and cannot be updated quarterly. To mitigate classification issues, SUTs should be generated annually.

Second, the government is enhancing GDP estimates with better data by shifting from the 2011-12 Employment and Unemployment Survey, conducted every five years, to utilizing the annual and quarterly Periodic Labour Force Survey (PLFS) starting from April 2017.

Third, CPI and GDP base year revision is overdue. However, the existing methodology should be retained, but better databases like GST and MCA data should be used at national and state levels.