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Base year, revised growth, overestimation & all that you need to know about calculating GDP

India's GDP estimates are under scrutiny again this week after former CEA Arvind Subramanian claimed country may have overestimated its growth by 2.5% points.

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New Delhi: India’s GDP estimates have been facing intense scrutiny again this week, particularly after the latest revelation from former chief economic advisor Arvind Subramanian that India may have overestimated its GDP growth by 2.5 percentage points between 2011-12 and 2016-17.

Questions are being raised on whether India not only overestimated its economic growth but also on the quality of databases used to arrive at the GDP estimates.

ThePrint looks at how is this important macro-economic indicator is measured and the controversies surrounding it.

What is GDP?

GDP measures the economic activity of the country as reflected by the production of goods and services in the economy. It is calculated by the Central Statistics Office in collaboration with other government departments.

How is GDP calculated?

GDP can be calculated by three methods.

The most used is the production method in which the gross value added by each industry is added and adjusted for taxes and subsidies to arrive at the GDP. Gross value added is the value addition done in a particular sector of the economy and is arrived at by subtracting the cost of inputs from the final value. This helps in eliminating double counting while presenting a true picture of the production activity in the economy.

The other method is the expenditure method that looks at the demand side of the products. GDP is arrived at by adding the private and government final consumption expenditure, the investment demand in the economy, reflected gross fixed capital formation and net exports (exports-imports).

The last method is the income method wherein the wages and salaries received along with the interest payments, gross profits and rent received is added to arrive at the GDP. Technically, the GDP arrived at using all the three methods should be the same but that is never the case in a large economy like India’s.

Also read: India’s slowdown: Blame faulty GDP data or should policymakers have used other indicators?

Why is the base year for calculating GDP changed?

Base year or the reference year for measuring real growth is changed every few years to ensure that the goods and services used in the GDP calculations reflect the present picture of the Indian economy. Besides this, base year revisions also see the incorporation of conceptual changes, changes in the methodology and inclusion of new and recent data sources.

For instance, the shift from the 2004-05 to the 2011-12 base saw a change in the way manufacturing activity was measured. The government used a database of companies maintained by the Ministry of Corporate Affairs along with other databases to measure the growth in the sector as against the database provided by the annual survey of industries and other sources used earlier.

Typically, the base year revision happens every five years.

What is real and nominal GDP?

Real GDP growth is the growth in the value of output in the economy adjusted for the prices. When one adds inflation to the real GDP, nominal GDP is arrived at. Nominal GDP forms the basis of all budget calculations, including tax collection projections and fiscal deficit calculations.

What explains the controversy surrounding the GDP data?

The controversy around GDP data started when the government released the contentious GDP data last November for the years prior to 2011-12 as per the new base. The data drastically revised growth downwards in the period between 2005-06 to 2011-12 which was when the Congress-led United Progressive Alliance (UPA) was in power. This prompted allegations of political interference in data with many economists questioning how growth could have been scaled down systematically for all sectors in the back series data.

Further, the use of the MCA-21 database in the GDP calculations was also questioned after the National Sample Survey Organisation (NSSO) pointed to some anomalies in the data.

The most recent controversy was sparked by former chief economic advisor Arvind Subramanian’s piece in The Indian Express on 11 June, in which he claimed that India may have overestimated its GDP growth by 2.5 percentage points and that the economy may have grown at an average of only 4.5 per cent in the period between 2011-12 and 2016-17.

Subramanian used the divergence in real sector indicators such as electricity consumption, railway freight and airline passenger traffic with the GDP numbers to argue that the manufacturing and the informal sector may have been over-estimated by the statisticians, though the government was quick to deny his claims.

Also read: At 5.8%, Q4 GDP growth is worse than expected, leaves no time for Sitharaman to settle in

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