Issues In Gdp Estimation In India

In 2015, a new methodology for calculating the country's GDP was developed by the Central Statistics Office.

• Change of base year to 2011-12 (from 2004-05) to capture the unorganized sector data from NSSO’s Employment-Unemployment Survey (EUS) of 2011-12.
• Adoption of National Account System (SNA) Recommendations, 2008:

O Gross Value Added (GVA) & Net Value Added (NVA) valuation at simple prices.

O To make the new measure more consumer-centered, considering GDP at market prices as headline GDP rather than GDP at factor expense.

O Treating unincorporated companies as quasi-corporations that hold accounts.

• Incorporation of the MCA21 database: Ensuring broad coverage of mining , manufacturing & services in the private sector. Earlier, the contribution of companies was measured using the Industrial Production Index & Annual Industry Survey.
• Wider financial sector coverage through the inclusion of stock brokers, stock exchanges, asset management firms, mutual funds and pension funds, as well as SEBI, PFRDA and IRDA regulatory bodies. Earlier figures included mostly commercial banks and NBFCs.
• Adopted Effective Labour Input (ELI) Method: Earlier, all groups of workers were presumed to contribute equally. Through assigning weights to various groups of workers based on their productivity, the new approach solves the differential problem of labour productivity.
• Usage of recent survey and census results: Existing data from recent surveys has been included in the estimation of GDP. Uh. E.g. 2010-11 Agricultural Census; 2012 All India Livestock Census; 2013 Debt and Investment Survey of All India, etc.

Concerns about the quality of the new GDP series in India stem from legacy issues with the country's national accounting system, which were either left unaddressed or exacerbated during the 2014-15 baseline year change exercise.

 

• Volatile Revisions: In overall GDP numbers, the revisions (between advance estimates & updated estimates) appear to have an upward bias, raising concerns about the credibility of GDP results. In addition, unpredictable revisions generate problems for policymakers who, based on initial projections, make decisions.

 

• Informal sector overestimation bias: The new GDP series assumes that the informal manufacturing ('quasi-corporations') sector has expanded at the same rate as the formal manufacturing sector, which in the new series may have exaggerated growth in the informal sector.

 

• Use of Deflators:

o Wholesale price index (WPI) as deflator for several sectors of the economy (particularly services) is inappropriate.

o Currently, in GVA calculation, instead of deflating output and input with their respective prices, common output deflator is used, which assumes that input & output prices move in same direction and thus, creates a bias. E.g. When oil prices were low, and input inflation was falling, while output inflation continued to rise, there had been a tendency of growth overestimation.

 

• Use of MCA21 database: The use of an untested corporate database, MCA-21 and the manner in which it is used in National Accounts for calculation under new GDP series is contentious. 

o MCA-21 database also lacks state-wise details, which has distorted state-level GDP. These changes have enormous implications for the borrowing limits of states (3% of GSDP as mandated by FRBM Act 2003), and on the devolution of resources to states by the Finance Commission.

✓ Most of the relatively prosperous states such as Delhi, Kerala and Karnataka saw a further boost to their GSDP, which allowed them to borrow more.

✓ Some states like Bihar and West Bengal saw their economies shrink, forcing them to reduce spending to meet fiscal deficit targets. 

✓ Devolution of funds by Finance Commission will be impacted as formula includes both fiscal performance & income distance.

 

• Shift from establishment to enterprise approach: The new GVA methodology shifted data collection from establishments (or factories) to enterprises (or firms). All the value added at enterprises classified as "manufacturing firms" goes into the calculation of manufacturing GVA. But, the activities of firms are much more diverse than factories (e.g. some subsidiaries may only look into services like transportation) and would not qualify as manufacturing.

• Administrative Issues: Lack of transparency and effective audit of the GDP database point to inadequate oversight of the Central Statistics Office (CSO), which is responsible for the National Accounts Statistics. Recent resignation of 2 members of National Statistical Commission (NSC) and non-appointment of new independent members appointed by the government further indicates lack of autonomy in statistical system in India.

 

• Existing data sources including MCA21 database should be properly authenticated before plugging it into National Account Statistics.
• New data sources and methodologies can be explored e.g. using transactions-level GST data to estimate expenditure-based estimates of GDP.
• The shift from establishment approach to enterprise approach will be successful only if all the disaggregated information in MCA21 database on activities of a firm is classified properly into appropriate sectors.
• Greater transparency on the methodology and better data dissemination standards can help improve the credibility of the official GDP numbers. The recent merger of Central Statistics Office (CSO) and National Sample Survey Office (NSSO) can help CSO to adopt transparent data practices of the latter.

Growth rates are critical for internal policy making as it has a bearing on both monetary and fiscal policies. E.g. If we over-estimate the growth rates, we might keep interest rates too high from a cyclical perspective, which might prolong growth stagnation. Therefore, it is important to see the broader message behind the concerns raised and make the process of GDP estimation more robust according.