Questions on India’s economic real growth
on the background of introduction of improved computing method of GDP
Background
A lot is being discussed about India’s new GDP
figures declared by the Central Statistics Office (CSO)for 2013-14 and the
improved method of calculating GDP in India.According to the CSO’s latest
publication, in the December 2014 quarter, India's GDP grew at 7.5 per cent surpassingworld’s
largest and fastest economy of China having 7.3 per cent growth. India seems to
be growing ahead of China – at least on paper.
Here are the top 5 states economies in India
Here are the top 5 states economies in India
Well known is the fact that GDP has a limited
purpose as a statistical indicator that only describes and quantifies process
of value addition in the economy. The newly invented methodonly does this more
accurately. It captures the chain of ‘value additions’ in large segments of the
economy previously uncovered. For example retail and wholesale trade activities
of informal sector are better reflected in new GDP.
Historically, there are 2 ways of calculating
growth – GDP at factor cost and GDP at market price.
GDP at factor cost is the total value of
factors of production (land, labor, capital, entrepreneurship) that are consumed
/ used to produce goods and services in a year.
GDP at market prices is the sum of market
prices of all goods and services produced in a year.
An
example showing difference between GDP at factor cost and GDP at market price
The price
paid by consumers for many goods and services is not the same as the price
(sales revenue) received by the producer. There are taxes that have to be
paid, which place a segment between what consumers pay and producers receive.
Thus, if a
consumer pays 100 for a meal in a restaurant the owner may receive only 86,
the remaining 14 will go to the government in the form of VAT. The term
factor cost or basic price is used in the national accounts to refer to the
prices of products as received by producers. Market prices are the prices as
paid by consumers.
Thus,
factor cost or basic prices are equal to market prices minus taxes on
products plus subsidies on products.So in this example,
GDP at
factor cost is what the producer receives (Rs 86)
Whereas GDP
at market price is what consumer pays (Rs 100)
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The Central Statistics Office has revised the
base year on which comparisons are made to 2011-12 from 2004-05.The specific
changes have been made in the following industries:
(a) Mining
and Manufacturing – private corporate performances have been taken into account
in the quarterly estimates.
(b) Trade
and other services – use of quarterly information on sales tax and service tax.
India's GDP is now measured at market prices
instead of factor cost (to match with internationally agreed standard)
India's GDP is now measured at market prices
instead of factor cost (to match with internationally agreed standard)
Currently under the new Modi-led BJP government’s
rule, a substantial fundamental reorganization is going on in the way India’s
economy is being run and monitored. Firstly, the subsidies and cross subsidies
are being lowered. And secondly, GST related reforms in indirect tax structure
are expected to alter the difference between GDP at factor cost and GDP at
market price (from example above)
As mentioned in the 10-page document ‘FAQs on the
new series of National Accounts’ by Central Statistics Office, “the new growth
figures are due to the improved method of calculating GDP in India. This new
method has enabled growth statisticians to measure manufacturing industry’svalue
added activities better, made possible by a new database of corporate balance
sheets.”
The merit of this new method is that it is in sync
with the developing economy of India, where one observes improvement in the per
unit value addition rather than in growth of volume. This is due to the changing
structure of economy and other technological changes. For example, as
production moves from generic to branded goods, physical production may not
change but the value added can increase. The new GDP calculation method is now
more sensitive to changes like product innovation and quality improvement
Is the increase in production volume of less importance
then? As CSO has put it, “there is growth in value added but it is accompanied
by slow growth in production volumes, which is a matter of concern.”
So let’s unanimously agree for now that there is
modernization in GDP calculation method which offers a more accurate picture of
the economic activity of India.
Doubts about the new GDP figures remain, however, as
the ground reality shows Indian economy is still struggling with capital
formation and foreign investments.
Measuring India’s economy is not an easy task; an
economy soexpansive and one that constitutes vast informal sector as a key
growth element.A huge share of India’s GDP is produced by individuals and small
enterprises that do not pay taxes and are not registered with the government.
“At the global level,
India is not the only or first country to get a higher GDP figures by just
changing the way it measures it. Nigeria last year was declared
the biggest African economy after it scaled up its 2013 GDP estimate by a
whopping 89 percent. Back in the 1980s, Italy overtook Britain as the
world's fifth-largest economy after reevaluating its GDP to include the
informal sector.”
Conclusion-
So the new GDP figures are just the improved revision,
and do not in any way imply that Indian economy’s growth rate has surged as a
seeming result of BJP’s 90 days miracle. Till the confusion regarding GDP data
gets cleared, let us not fool ourselves by linking Modi-led big economic
reforms to the new GDP figures. And certainly not assign any credits to Modi’s
legitimate dream of making India’s GDP $ 20 trillion from the current $ 2
trillion –as the cause of new GDP figure.
Bibliography-
·
FAQs on the new series of National Accounts by
Central Statistics Office
·
Press note on advance estimates of national income
2014-15 and quarterly estimates of gross domestic product for the third quarter
(Q3) 2014-15 by Central Statistics Office.
Meenal Inamdar,
Independent paper for GreenEarth Social Development Consulting
