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Calculating GDP Easier Way

The document discusses recent changes made to how India calculates its gross domestic product (GDP). There were two key changes: updating the base year to 2011-12 to make the calculation more contemporary, and adopting a new method of measuring GDP using gross value added at market prices rather than factor cost. This brings India's GDP calculation more in line with global practices and may result in investors viewing India's growth prospects more favorably. However, the changes also provide incentive for the government to potentially raise indirect taxes and cut subsidies.

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75 views2 pages

Calculating GDP Easier Way

The document discusses recent changes made to how India calculates its gross domestic product (GDP). There were two key changes: updating the base year to 2011-12 to make the calculation more contemporary, and adopting a new method of measuring GDP using gross value added at market prices rather than factor cost. This brings India's GDP calculation more in line with global practices and may result in investors viewing India's growth prospects more favorably. However, the changes also provide incentive for the government to potentially raise indirect taxes and cut subsidies.

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https://www.thehindubusinessline.

com/opinion/columns/all-you-wanted-to-know-about-calculating-
gdp/article22508569.ece

All you wanted to know about Calculating


GDP
MEERA SIVA, Published on February 02, 2015
Suddenly the Indian economy is looking much better than it did two weeks ago,
thanks to a little sleight of hand. The Government’s statistics wing made two
changes to the GDP calculation last week which have had the happy effect of
lifting growth to 6.9 per cent for 2013-14 instead of 4.7 per cent as estimated
earlier.
What is it?
There have been two changes to the GDP calculations. One was a change in the
base year for the calculation which is done routinely every five years or so. The
other was to adopt a new method to measure output. But why make any
changes?
Starting now, Indian GDP will be measured by using gross value added (GVA)
at market price, rather than factor cost. If you are not an economist, the previous
sentence may have sounded like it’s in Swahili. Simply put, GDP is the total
value of goods and services produced within the country during a year. You take
all final finished goods and services produced domestically in volume terms and
multiply this by their market prices to arrive at the value of output. Intermediate
goods need to be excluded to avoid double-counting.
In India GDP did not include what that the Government received. Now, what it
earns by way of indirect taxes such as sales tax and excise duty after deducting
subsidy is also added into the GDP.
Why is it important?
You can question the timing, but the change in method of calculation has
brought Indian GDP calculations more in line with global practise. For example,
IMF’s world economic outlook projections, which all of us used even recently
to make India-China comparisons, are not based on factor costs. This used to
create confusion in the past, with IMF’s projections turning out to be very
different from the Government’s.
As for the base year change, it is the only way to ensure that the products and
services included in the GDP calculation do remain contemporary and reflect
the present state of the economy.
For instance, the latest change in base year from 2004-05 to 2011-12 has
included the recycling industry which didn’t figure in the earlier GDP
computations.
Similarly trading activities by manufacturing firms are now included in that
sector’s share. This change along with better data compilation (online data filed
with the Ministry of Corporate Affairs) has led to manufacturing increasing its
share in GDP.
Why should I care?
Global investors use growth prospect numbers to allocate their investment
allocations between countries - GDP is a key metric here. So news that India’s
GDP growth has averaged 6 per cent for the last three years and not 4.6 per cent
as thought earlier, may help investors view India in a more favourable light.
Let’s not forget that important indicators such as the fiscal deficit are measured
as a ratio of GDP too. Economists say that the latest revisions will help the
Government meet this year’s fiscal deficit target. A more comfortable deficit
number could help the Government stop tightening its belt and consider budget
sops.
With indirect taxes added and subsidies deducted under the new GDP
calculations, there is more incentive for the Government to raise indirect taxes
and reduce subsidies. This may have an impact on sectors such as agriculture
which receive a lot of subsidy.
The bottom line
It’s not always the economy, stupid. It’s sometimes the calculation.

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