Let People Know Methods of GDP Growth Calculation

Published: 20th February 2016 10:00 PM  |   Last Updated: 18th February 2016 11:29 PM   |  A+A-

In February 2008, then French President Nicholas Sarkozy appointed the Commission on Measurement of Economic Performance and Social Progress (CMPSP), with Joseph Stiglitz as President, Amartya Sen as adviser and Jean Paul Fitoussi as coordinator. It produced an elaborate report on the methods of evaluation of GDP and proposed that it should contain more reliable measure of economic well-being than the stale one of market production in money terms. They name it “Mismeasuring Our Lives”.

Though the GDP calculation has several drawbacks, it is the only measure with an internationally acceptable methodology to analyse the progress of an economy and to compare with other economies. In India, hot debates are brewing up regarding GDP calculation in the new series with 2011-12 as the base year. By shifting towards new series, Indian economy shot up from the slump and is showing a brave face with 7.4 per cent growth rate in the current fiscal. Internationally, India has surpassed the growth rate of China, which was just a dream a few years ago.

The three-year projection in the new methodology is painting a better picture compared to the former methodology, which had sub-5 per cent growth rate in the same period. The new methodology has helped India catch up with a virtual well-being at least on paper.

Now GDP at factor cost will no longer be discussed; instead, industry-wise estimates will be presented as gross value added (GVA) at basic prices while GDP at market prices will be referred to as GDP and it will be equal to GVA at basic prices plus production taxes minus subsidies.

With GDP and GVA numbers telling different stories, economists also have divergent views on it. The Reserve Bank of India prefers GVA to give its projection, but National Statistical Commission (NSC) Chairman Pronab Sen says one should focus on both GDP and GVA to access economic parameters. CRISIL chief economist D K Joshi opines that GDP is an indicator of the health of the economy. Sajjid Z Chinoy, chief India economist at JP Morgan, says GVA seems to be a better representation of economic activity on the ground.

Interestingly, in some cases GDP and GVA are growing at different paces and often one is lower than the other. In the present context, the lesser burden of subsidy (due to the oil price collapse) will increase the GDP.

The product taxes and product subsidies are playing an important role in the GDP calculations now, which means the management of public finance has a major role in the analysis of the economy. This will have a direct bearing on the macroeconomic indicators since crucial public finance parameters are compared on the basis of GDP. For example, if X per cent fiscal deficit is permissible, a higher GDP will bring more money to the treasury and vice versa. More production taxes make GDP higher.

In short, the government cannot inflate GDP by more subsidies and lesser taxes. The complex and beautiful connection between the economy and public finance has been well reflected in the new methodology.

The concept of GVA at basic prices (the base of the new methodology) is based on the United Nations’ System of National Accounts (SNA) introduced in 1992-93 and taken forward and improved in SNA 2008 as part of

the revision on compilation and classification system. This was adopted by the Central Statistical Organisation in India in January 2015. But unfortunately, the intricacies of the new methodology have not yet been discussed and explained among the academics, policy-makers and general public.

Since GDP projections are not for limited consumption, the Government of India should come forward to convince the public that the changes in economy have been calculated in an absolutely transparent and scientific manner. 

cpjohn.kerala@gmail.com

John is member, Kerala state planning board

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