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Fresh Row: What is India’s GDP and how is it calculated?

An NSSO survey has found many companies as untraceable, triggering a debate whether India has been overestimating its GDP levels and growth

September 09, 2019 / 06:10 PM IST

A latest National Sample Survey Organisation (NSSO) report has raised fresh questions over India’s gross domestic product (GDP) and national income calculation methodology. According to Mint, which first wrote about it on May 8, 2019, about 38% of companies, which the NSSO surveyed from the MCA-21 database of companies used for calculating GDP, could not be traced or were wrongly classified.

Here’s a primer:

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.

How is GDP calculated? 

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It can be calculated by using three methods—the supply or production method, the income method and the demand or expenditure method and by definition the value of GDP should be identical, irrespective of the method used. This is because one person’s or entity’s income is another person’s spending on expenditure. For instance, what households spend in buying provisions at a local store is the shop owner’s income. Likewise, an employee’s salary is what his/her company spends.

 How is GDP calculated using the supply or production method? 

The monetary value of all products and services generated across the economy will give the country’s GDP.

 How is GDP calculated using the income method? 

Simply put, adding the earnings of all the people and the income of capital employed would give the GDP of the country.

 How is it calculated using the demand or expenditure method? 

The government spends money on welfare measures and salaries of its employees. Industry incurs expenditure on investment and wages. Consumers spend money on buying goods and services, or saving. The sum total of spending made by all entities across the economy would give the GDP of the country.

 What is 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 allows calculation of inflation-adjusted growth estimates.

The new series has changed 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.

 What are the main differences in the old and new methods to calculate GDP? 

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.

Also read: Opinion | 'How's life?' No, GDP doesn't answer this question

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

 

The CSO releases the quarterly GDP estimates with a two-month lag every year. It also releases annual advance estimates in first week of January and later in the last week of February. National accounts estimates go through multiple revisions through three years based on updated data across sectors.

The first provisional annual estimates are released on the last working day of May. So, for 2018-19, the provisional GDP estimates will be released on May 31, 2019.

It will be later revised with fresh data and the first revised estimates for 2018-19 will be released on the last working day of January 2020. It will again be revised with more updated data and the second revised estimates will be released on the last working day of January 2021.

Till the release of provisional estimates in any year, the estimates are based on indicators such as IIP, wholesale price indices, core sector data on steel, cement, electricity, revenue expenditure, GST data, trade data on imports and exports, consumer prices, among others.

The estimates based on indicators are reworked when the corresponding data source becomes available. By the time of the Third Revised Estimate, the coverage and completeness in the data sources are almost final and no further revision takes place. 
Gaurav Choudhury
first published: May 9, 2019 03:28 pm

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