DECODED: What’s the fuss about the new GDP data?

On November 28, the NITI Aayog and the Central Statistics Office (CSO) released the 'back-series' of India’s gross domestic product (GDP) data from 2005-06, using a new methodology, that shaved off the previous growth estimates by a few percentage points in several years.

The new data showed that the Indian economy did not grow at a scorching pace during the erstwhile UPA government’s years as it was earlier made out to be.

The data has triggered a raging debate over the formula with the Congress accusing the government of manipulating data.

Here’s all you wanted to know:

What is GDP?

Gross Domestic Product or GDP represents the total value of all the final goods and services that are produced within a country's borders within a particular time period, typically a year or a quarter. 

Real and nominal GDP?

Nominal GDP is calculated at current prices. Real GDP is GDP adjusted for inflation. 

What is a “base year”?

The base year of the national accounts is chosen to enable inter-year comparisons. It gives an idea about changes in purchasing power and enables calculation of inflation-adjusted growth estimates.

The new series changes the base to 2011-12  from 2004-05. Every national accounts dataset gives GDP calculations for two years: 2011-12 and the current year.

When was the new series launched?

A decision to change the GDP calculation method was taken during the UPA-II years. The NDA government launched the first set of data, giving out levels of GDP and growth rates from 2011-12.

Back series

The back series data serves as a link between the old and new formulae. The back series is aimed at calculating/updating national accounts using the new formula to help allow inter-year comparisons and enable better economic forecasting. 

Old vs new formula

In the previous method, the index of industrial production (IIP) or factory output was the main measure to calculate manufacturing and trading activity. The limitation was, that this only counted volume and did not give an idea about value. For instance, in the old method, the number of motorcycles produced in the plant was counted, as opposed to the motorcycles’ value that the plant rolled out.

In the communication sector, telecom subscriber base was used in the old sector as compared to minutes of usage in the new formula.

What’s on now?

Previously, the first GDP estimates were based on IIP data. It was updated every two years factoring in data from the Annual Survey of Industries (ASI). ASI only gave out goods’ value produced by firms registered under the Factories Act.

Now, the corporate affairs ministry’s MCA 21 records, a wide-ranging compilation of balance sheet data of about 5,00,000 firms, is used.

The new method adopts a gross value added (GVA)-based approach as compared to a pre-dominantly volume-based calculation previously.

This factors in value addition and economic action carried out by activities such as marketing. Such activity can be of a very high value in case of large FMCG companies.

What’s the biggest criticism of the new estimates?

Owing to the limitations of the availability of data, in some areas either splicing method or ratios observed in the estimates in the base year 2011-12 for the previous years. The big question is: How can you extrapolate MCA 21 data for previous years when the data itself started getting collated only in 2008 and has undergone several rounds of changes in the later years.

What about the rural economy?

The earlier formula mainly used farm produce as a proxy for calculating agricultural income. The new method has widened the scope for calculating value addition in the agricultural sector. Official statisticians say that livestock data is more widely captured in the new method. For instance, values are now also attached to byproducts of meat including “heads and legs”, “fat” “skin”, “edible offal and glands” of cattle, buffalo, sheep, goat and pig.

Calculation of labour income?

In the earlier GDP calculation, all labour was treated as equal. The new series has used a concept called “effective labour input”. It assigns different weights are assigned on whether one was an owner, a hired professional or a helper. 

Value of trading-related services

The new series uses NSSO’s 2011-12 establishment survey, compared to the 1999 survey data used in the earlier series. The latest survey showed that value addition in trade was significantly lower than what was being projected in the old series, which used extrapolated data from a survey conducted in 1999.

Income generated by the financial sector

Official statisticians say the new series has significantly widened the scope of capturing economic activity and value addition in the financial sector. The earlier series was limited to a few mutual funds (primarily UTI) and estimates for the Non-Government Non-Banking Finance Companies as compiled by RBI.

In the new series, the coverage of financial sector has been expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.

Local bodies and autonomous institutions

Economic activity of local bodies and autonomous institutions were earlier estimated on the basis of information received for seven autonomous institutions and local bodies of only four States – Delhi, Himachal Pradesh, Meghalaya and Uttar Pradesh. The new series has far wider universe that captures 60 percent of the grants/transfers provided to these institutions.

Why the criticism?

It was previously estimated that India clocked double-digit growth of 10.3 percent in 2010-11. This has now been revised to 8.5 percent, according to the new estimates.

Likewise, real or inflation-adjusted GDP growth rates of 9.3 percent, 9.3 percent and 9.8 percent in 2005-06, 2006-07, 2007-08 respectively have now been revised downwards to 9.9 percent, 8.1 percent and 7.7 percent.

According to the new series, GDP growth rate dropped to 3.1 percent in 2009-10, compared to the previous estimates of 3.9 percent, mirroring a deeper impact of the global financial crisis of 2008 on the Indian economy than previously thought.

Why the sharp drop in GDP growth rates?

According to the government, several factors that affected primary, secondary and tertiary sectors of the economy were over-reported in the previous estimates.

Growth rates in the primary sector fell from 5 percent in 2005-06 to 2 percent in 2011-12 against 4.6 percent in 2005-06 to 4.4 percent in 2011-12 in the previous estimates.

Secondary sector growth rates fell from 10.2 percent in 2005-06 to 6.6 percent in 2011-12 in the new series compared to 10.7 percent and the 8.5 percent respectively.

Tertiary sector growth rates fell from 9.1 percent in 2005-06 to 5.9 percent in 2011-12 according to the back series against 10.9 percent and 6.9 percent respectively earlier. 

Why is there such a big difference?

The difference can also be partly attributed to change in the GDP “deflator” method. GDP deflators are price indices used to calculate inflation-adjusted levels of GDP. In the new estimates, different GDP deflators have been used for different sectors of the economy.