BACK SERIES OF GDP AND ITS IMPORTANCE

BACK SERIES OF GDP AND ITS IMPORTANCE

India now measures GDP by market prices instead of factor costs, so that gross value addition in goods and services, as well as indirect taxes, is taken into account. The base year has also been shifted to 2011/12 from 2004/05. The new method is more in line with global practices and gives a better picture of economic activity. So, recalculating the growth rates of previous years based on new methodology is back series data.

Incumbent Union Finance Minister has rejected opposition’s criticism of new GDP data series arguing that the new GDP series is more broad-based and is a better reflection of the Indian economy and is globally more comparable.

Best ISS coaching in Delhi observes that in a way, according to this back-series calculation of GDP under new series in 2010-11 stands out as an exceptional year when not only GDP and GVA growth rates grew rapidly but also net indirect tax collection increased by an unprecedented 31.5 percent. However, prices also showed a distinct upward trend as GDP deflator increased by 9.0 percent and this upward trend in prices turned out to be one of the major reasons for the subsequent UPA downfall. Nevertheless, statistically, this seven-year period (between 2004-05 and 2010-11) remains the best performance of the Indian economy in terms of GDP growth rates to date.

 

WHAT LED TO A DOWNWARD REVISION IN GDP IN THE NEW SERIES?

 

Broadly, for the overlapping years (fiscals 2006 to 2014), overall GDP growth is lower than the old series by an average of 80 basis points. The highest that the GDP growth has touched as per this series is 8.5% in fiscal 2011 as against 10.3% recorded by the old series. From the demand side, the new base series leads to significantly lower growth rates in private and government consumption, based on trends seen by newer sets of proxies. 

From the supply side, growth in gross value added (GVA) is 100 bps lower in the new series compared with the old. Growth was estimated to be slightly lower in trade, hotels, transport, and communication and about 430 bps lower in the financing, insurance, real estate, and business services. Growth is estimated higher in community, social and personal services.

 

 

WHAT WERE THE FINDINGS OF THE NEWLY RELEASED BACK SERIES?

 

The back series released this year has trimmed the growth numbers for the UPA government’s nine years (2005-06 to 2013-14), with the Indian economy growing at an average of 6.7% in four years of the UPA’s first term (2005-06 to 2008-09) as well as the UPA’s second term (2009-10 to 2013-14), which are lower than the earlier estimates of 8.1% and 7.0% (2004-05 base) respectively. These growth rates compare with an average 7.4% growth rate (2011-12 base year) seen during the first four years of the present NDA government.

Barring two of the years, 2012-13 and 2013-14, the back series data released for years preceding 2011-12 scaled-down growth rates for 2005-06 to 2013-14 by 0.8 to 2.1 percentage points. For 2012-13, the back series based on the new base year (2011-12) revised the GDP growth rate upwards to 5.5% from 4.7% estimated earlier (2004-05 base year), while for 2013-14, the GDP growth rate was revised up to 6.4% from 5.0% estimated earlier.

Sharp downward revisions were seen particularly for two years, 2007-08 and 2010-11. For 2010-11, the growth got revised downwards from a double-digit rate of 10.3% to 8.5%. The 8.5% cent growth in 2010-11 is the highest growth rate in the back series dating back to 2005-06.

 

ARE THERE ANY GREY AREAS?

Dramatic changes have been observed in the values and growth rates of the GDP and its principal constituent sectors. Ravindra H. Dholakia, who is an external member of the Monetary Policy Committee of the RBI and an IIM Professor, argued in an article that there are gaps in the new measurement method of the GDP. 

 The National Statistical Commission says that it is a work in progress. One can only hope this “work in progress” would rescue the important methodology of GDP measurement from the deep cloud of smoke it is currently in, as soon as possible. Till then, it does not seem that political shadow-fighting under the mask of economic sparring will stop very soon.

 

There is not enough explanation for the choice of datasets and proxies, especially those datasets that didn’t exist before 2011-12. Though the CSO release mentioned the usage of several proxies, there were no details about why those were selected over other datasets. For instance, for years preceding 2006, when the MCA-21 database did not exist, the CSO has used ASI data for estimating manufacturing growth whereas economists say there could have been other indicators for the same metric.

The role of the NITI Aayog in the release of the statistical exercise of CSO, which comes under the Ministry of Statistics and Programme Implementation (MoSPI), has also been questioned.

Also, the use of volume data for the calculation of the back series, which could have potentially underestimated growth, has been questioned by economists. International Growth Centre’s India Director and former Chief Statistician of India Pronab Sen said, “The current series is based on company data, MCA-21, which is the balance sheet data, whereas the back series is based on volume data. So in the case of the secondary sector, it was based essentially on the Annual Survey of Industries. We do know that ASI was underestimating growth in manufacturing, so I had expected to be revised upwards. But that has been revised downwards as well.”

He added, “The System of National Accounts prefers to go with volume indices, so if the new series had been volume index-based then that would have been OK. Unfortunately, the new series is not. And the big difference between the volume index approach and the financial data approach is that the financial data capture changes in quality which the volume approach does not. So if a substantial part of the growth has been coming from quality, then if you take the volume approach you would underestimate the growth.”