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What Is GDP?: Background of India's GDP

GDP, or Gross Domestic Product, is a measure of the total economic output of a country. India regularly updates the base year used to calculate GDP to better account for economic changes. The base year was recently changed from 2004-05 to 2011-12, and may soon change again to 2017-18. Changing the base year allows GDP and economic growth figures to more accurately reflect current economic conditions. GDP growth rates were revised upwards for previous years after the last base year change. Gross Value Added is also used as a measure and provides sector-specific output, with both GDP and GVA needed to fully understand an economy. Recent figures show a slowdown in India's economic growth rates across several sectors in the second quarter

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69 views4 pages

What Is GDP?: Background of India's GDP

GDP, or Gross Domestic Product, is a measure of the total economic output of a country. India regularly updates the base year used to calculate GDP to better account for economic changes. The base year was recently changed from 2004-05 to 2011-12, and may soon change again to 2017-18. Changing the base year allows GDP and economic growth figures to more accurately reflect current economic conditions. GDP growth rates were revised upwards for previous years after the last base year change. Gross Value Added is also used as a measure and provides sector-specific output, with both GDP and GVA needed to fully understand an economy. Recent figures show a slowdown in India's economic growth rates across several sectors in the second quarter

Uploaded by

Nivedita Raje
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What is GDP?

GDP full form is Gross Domestic Product is evaluated regularly to account for
changing production structure, relative prices and better recording of economic
activities.

Background of India’s GDP

 In January 2015, the government moved to a new base year of 2011-


12 from the earlier base year of 2004-05 for national accounts. The base
year of national accounts had been revised earlier in January 2010.
 In the new series, the Central Statistics Office (CSO) did away with
Gross Domestic Product (GDP) at factor cost and adopted the
international practice of valuing industry-wise estimates as gross value
added (GVA) at basic prices.
 With the move to the new base year, the growth rate of the economy for
2013-14 was estimated at 6.9%; it was 4.7% on the 2004-05 base.
Similarly, the growth rate for 2012-13 was revised upwards to 5.1% from
4.5%.

Latest developments

The Ministry of Statistics and Programme Implementation (MOSPI) is


considering changing of base year for GDP calculation from 2011-12 to 2017-
18.

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 last series has changed the base to 2011-12 from 2004-05.

Need for Change

 Accuracy: Change of base year to calculate GDP is done in line with the


global exercise to capture economic information accurately.
 Globally Aligned: GDP based on 2011-12 did not reflect the current
economic situation correctly. The new series will be in compliance with
the United Nations guidelines in System of National Accounts-2008.
o Ideally, the base year should be changed after every five years to
capture the changing economy.

GDP calculation in India


 Gross Domestic Product (GDP) gives the economic output from the
consumers’ side. It is the sum of private consumption, gross investment
in the economy, government investment, government spending and net
foreign trade (the difference between exports and imports).

o GDP = private consumption + gross investment + government


investment + government spending + (exports-imports)

 In 2015, the Central Statistics Office (CSO) did away with GDP at factor


cost and adopted the international practice of GDP at market price and
the Gross Value Addition (GVA) measure to better estimate economic
activity.

o GDP at market price = GDP at factor cost + Indirect Taxes –


Subsidies

Gross Value Added (GVA)

 Gross Value Added (GVA) is a measure of total output and income in the
economy. It provides the rupee value for the number of goods and
services produced in an economy after deducting the cost of inputs and
raw materials that have gone into the production of those goods and
services.
 It also gives sector-specific picture like what is the growth in an area,
industry or sector of an economy.
 At the macro level, from a national accounting perspective, GVA is the
sum of a country’s GDP and net of subsidies and taxes in the economy.

o Gross Value Added = GDP + subsidies on products - taxes on


products

Comparison Between GVA and GDP

 While GVA gives a picture of the state of economic activity from


the producers’ side or supply side, the GDP gives the picture from the
consumers’ side or demand perspective. 

o Both measures need not match because of the difference in


treatment of net taxes.
 GVA is considered a better gauge of the economy. GDP fails to gauge
real economic scenario because a sharp increase in the output, only due to
higher tax collections which could be on account of better compliance or
coverage, rather than the real output situation.
 A sector-wise breakdown provided by the GVA measure helps
policymakers decide which sectors need incentives or stimulus and
accordingly formulate sector-specific policies. 

o But GDP is a key measure when it comes to making cross-country


analysis and comparing the incomes of different economies.

Key Points

 Growth in Gross Value Added (GVA) dipped to 4.3% in Q2 of 2019-20


from 6.9% in Q2 of 2018-2019.
 Manufacturing Sector Growth contracted1% as against 6.9% growth last
year during the same quarter.
 Agriculture, forestry and fishing sector recorded a growth rate of 2.1% as
against 4.9% last year.
 The ‘Financial, Real Estate & Professional Services’ category saw growth
slow to 5.8% in Q2 of 2019-20, compared with 7% in Q2 of the previous
year.
 Private final consumption expenditure, the closest proxy in the data to a
measure of consumption demand, grew 5.06% in Q2 of 2019-20 as
against the growth of 9.79% in Q2 of the previous year.
 Gross fixed capital formation, which is a measure of the level of
investment in the country by both the government and the private sector,
grew only 1.02% in Q2 of 2019-20 as against the growth of 11.8% in Q2
of last year.

Recent Signs of Economic Slowdown

 The collapse of IL&FS in September 2018.


 The financial sector is on the brink as indicated by huge number of Non-
Performing Assets (NPAs).
 Though the Reserve Bank of India has cut the key policy rates (like Repo
rate), the banks have not transferred the same to the final consumers.
Thus, the two critical needs of the industry i.e. cost of credit and
availability of credit, have not been met fully.

o The cumulative cut of 135 basis points by the RBI over the last
nine months has translated into a meager 29 basis points (just over
a fifth), with banks still retaining a huge spread.
o Cost of credit continues to remain high for most companies and the
worst affected are small and medium enterprises.

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