Central Statistics Office (CSO) proposes to replace the gross domestic product (GDP) series of 2011-12 base year with a new set of National Accounts using 2017-18 as the base year.

The chief statistician at CSO has also said that the replacement will be done as soon as the new consumer expenditure survey and the Annual Survey of Industries (ASI) results become available.

Background:

For the past four years, there has been a raging controversy over the current GDP figures on account of questionable methodologies and databases used.

  • Officials data entails that-
  • The annual economic growth rate has sharply decelerated to about 5% in the latest quarter, from over 8?ew years ago.
  • Data also said that the annual GDP growth rates during the last few years may have been overestimated by 0.36 to 2.5 percentage points.

Reasons for Distrust in the Official GDP Figures:

  • In order to understand the dispute related to the methodologies and databases used, one has to go back to early 2015 when the CSO released a new series of GDP with 2011-12 as base-year, replacing the earlier series with the base-year 2004-05.
  • Periodic rebasing of GDP series every seven to 10 years is carried out to account for the changing economic structure and relative prices. 
  • Such rebasing usually led to a marginal rise in the absolute GDP size on account of better capturing of domestic production using improved methods and new databases. 
  • However, the underlying growth rates seldom change, meaning that the rebasing does not alter the underlying pace of economic expansion.

Change in Growth in the new base year:

  • The absolute GDP size in the new base year 2011-12 contracted by 2.3% (compared to the old series), and the annual GDP growth rate went up sharply from 4.8% in the old series to 6.2% in 2013-14. 
  • Similarly, the manufacturing sector growth rate for 2013-14, swung from (-) 0.7% in the old series to (+) 5.3% in the 2011-12 series. 

The higher growth estimates recorded by the new series did not square with related economic indicators such as-

  • Bank credit growth
  • Industrial capacity utilisation or fixed investment growth. 

Previous concerns of rebasing the GDP with 2011-12:

The released data of GDP with 2011-12 as base-year by CSO did not reflect the macroeconomic parameters like tax revenues, credit growth, trade performance, corporate sales, profits, more importantly, the level of investment in the economy etc.

  • Bank Credit Growth: The Bank Credit Growth has averaged 20.3?tween FY07 to FY12 and 12.3?tween FY13 to FY18.
  • GDP Growth: During the same tenure, the GDP growth rates have averaged 6.7% and 6.9% respectively (against the older growth rates of 8% and 6.9% respectively).
  • Investment Growth: In the case of the investment growth, there has been inconsistency in between FY07 to FY12, the growth rate of investment was 10.7% and 5.3?tween FY13 to FY18.
  • Tax Collections: In between FY07 to FY12, the tax collections have grown by 16.5% and then post that by 13.8%. Tax collections directly linked to the economic growth.

Know the root of the problem:

The source of the problem, according to many economists, is the underlying methodologies for calculating GDP (in the 2011-12 series) which they claim are deeply flawed.

  • Criticism made on Changes:

The methodological changes made in the 2011-12 base-year revision have adversely impacted the quality of SDP estimates on two counts. 

  • First, the Ministry of Corporate Affairs data does not have factory identifiers (that is, the location of production units, but only has the location of the company head office); it has distorted distribution of the SDP estimates across States. 
  • Second, for estimating value-added in the informal or unorganised sector, State-specific labour productivity estimates are unavailable in the 2011-12 series. Hence the method used distorts output estimation.

CSO on Criticism:

  • The CSO has denied the claim that the underlying methodology is flawed and that there are serious problems with the new database being used. 
  • They pointed that the 2011-12 GDP series follows global best practices (meaning, following the latest United Nations System of National Accounts guidelines) and applies better methods using much larger datasets;

Way Ahead:

The proposed change over to a new base-year of 2017-18, is, in principle, a welcome decision.  Doubts will persist so long as the underlying methodological apparatus remains the same; feeding it with up-to-date data is unlikely to improve its quality.

Conversely, if a new rebased series is introduced without any changes it will only entrench the existing methodological problems.

In view of the problems with the current series, 

  • A chorus of academic and public voices has proposed setting up an independent commission of national and international experts to review the GDP methodology. 
  • The data/results should be realistic and reflective of the ground reality. 
  • Opinion and involvement of experts are needed to make the methodologies and calculations more transparent.