Unravelling the complexities of India’s 2011-12 GDP series is key

Source- The post is based on the article “Unravelling the complexities of India’s 2011-12 GDP series is key” published in “mint” on 9th May 2023.

Syllabus: GS3- Indian economy and growth

News – The article explains the changes incorporated in 2011-12 series to calculate the GDP.

What are numerous conceptual and statistical changes, incorporated in the 2011-12 series?

It was aimed at aligning the series with recommendations of the System of National Accounts (SNA) 2008.

Traditionally, in India, GDP referred to GDP at factor cost. Gross Value Added at Basic Prices was introduced as a new aggregate in new series. The new reference for GDP became GDP at Market Prices.

The differences between these aggregates are due to a segregation of production and product taxes. Production taxes does not change with the level of output, such as stamp duty or registration fees. Product taxes include ad-valorem or indirect taxes.

There was the inclusion of a new class of assets, namely Intellectual Property and Cultivated Biological resources, under Gross Capital Formation. This addition recognized the growing importance of intangible assets in modern economies.

Another significant change was the capitalization of Research and Development (R&D) expenditure by government, public and private corporations. In the previous series, R&D was treated as intermediate consumption.

In new series, R&D output was capitalized as intellectual property products. It acknowledges its role in fostering innovation and driving long-term economic growth.

The 2011-12 series also introduced changes in the treatment of Private Final Consumption Expenditure (PFCE) of households. Expenditures on gold and silver were previously considered consumption expenditures.

In the new series, they were reclassified as ‘valuables’ under capital formation. This change highlighted the role of such spending as a store of wealth and a form of investment, rather than simple consumption.

The 2011-12 series saw major revisions in the methodology and estimates in several subsectors, such as organized manufacturing and the services sector.

The incorporation of the MCA21 database improved coverage of registered companies in manufacturing and services.

A new Effective Labour Input method was introduced for estimating value added in the unincorporated manufacturing and services sector. It considered the differing marginal productivity of various types of workers.

Unincorporated enterprises that maintained books of accounts were reclassified as ‘quasi corporations’. These were included in the Private Corporate Sector instead of the Household sector.

The coverage was extended to major municipal bodies and autonomous institutions. It is ensuring a broader representation of economic activities.

The services sector expanded to include NBFCs, regulatory bodies and services of stockbrokers, mutual funds and pension funds.

The output of the Reserve Bank of India underwent a methodological change. Previously, it was calculated as a mix of market and non-market output. The new series considers the entire output of RBI as a non-market activity and measures it using the cost approach.

What are numerous issues related to 2011-12 series?

It ranges from methodological concerns to data inconsistencies.

There are issues related to implementation of base year changes, the use of outdated data sources and the impact of a rapidly evolving economy on GDP estimation.