GDP Base Year Revision

• 12 Oct 2024

For Prelims: Gross Domestic Product, Index of Industrial Production, Annual Survey of Industries, Deflator, CPI, WPI, Unorganised Sector, Base Year, Advisory Committee on National Accounts Statistics, Goods and Services Tax, ASUSE (Annual Survey of Unincorporated Sector Enterprises). 

For Mains: Concept of a base year, Need for its regular updation, Challenges associated. 

Source: BS 

Why in News?

Recently, the Ministry of Statistics and Programme Implementation (MoSPI) brought together many economists and forecasters to discuss the revision of the base year for India’s Gross Domestic Product (GDP). 

• It underscores the importance MoSPI places on wider consultation, especially given the criticism and debates surrounding previous base year revisions. 
• The previous base year revision in 2015 changed the base year from 2004-05 to 2011-12 but faced criticism due to perceived flaws in the methodological changes. 

What are the Previous Base Year Revision Controversies? 

• Methodological Concerns: Previous revision of base year replaced computing GDP of the private corporate sector (PCS) directly from the audited balance sheets of the Ministry of Corporate Affairs (MCA) database and the use of PCS data for estimating manufacturing sector GVA. 
  • It mostly discarded the Index of Industrial Production (IIP) and Annual Survey of Industries (ASI) data in the process. 
• Single Deflator Criticism: Many experts questioned the single deflator used to calculate real GDP growth from nominal GDP growth, rather than the internationally standard technique of double deflation. 
  • Single deflator involves deflating  the nominal value-added in each sector by various price indices e.g., CPI, WPI  while double deflation involves deflating output by output prices and inputs by input prices. 
  • The GDP price deflator measures the change in the value of all of the goods and services produced in an economy when inflation is taken into account. 
• Discrepancies in GDP Estimates: While overall GDP growth seems robust, consumption appears weak and this is a sign of serious measurement problems. 
  • Also, there is a discrepancy between production methods and the expenditure methods of calculating GDP. 
  • Weak consumption may indicate underreported economic activities or problems calculation of inflation in GDP calculations. 
• Under-reporting of Data: In the last three decades, there has been significant growth in the number of registered companies, particularly in the services sector, especially finance.  
  • However, their contribution to domestic output is unclear because many do not file their audited balance sheets with the Registrar of Companies (RoC). 
• Underestimating Unorganised Sector: The 2015 revision of base year faced criticism for the use of balance sheets of the unorganised sector to calculate GDP, instead of taking value-added figures from the producing units. 
  • It means a lower coverage for informal sector producers, who are not listed as companies. 
• Averaging Problem: Averaging production and expenditure sides is acceptable in advanced countries but not in developing countries, as India does not measure the two sides of GDP independently. 
  • Also, the data on the expenditure side of which consumption is a part is quite poor. 

What is a Base Year? 

• About Base Year: A base year is a specific reference year against which Gross Domestic Product (GDP) figures for subsequent and prior years are calculated.  
• Need for a Base Year: It provides a stable reference point and serves as a benchmark for measuring economic performance and allows for comparisons over time.  
  • By pegging GDP figures to a specific year, analysts can accurately interpret trends and shifts in economic performance. 
• Features of a Base Year: The base year should be a normal year i.e., it must not experience any abnormal incidents such as droughts, floods, earthquakes, pandemic, etc. Also, it should not be too distant in the past. 
• Reasons for Revising the Base Year:  
  • Fluid Nature of Indicators: The indicators for computing GDP are dynamic and can change over time due to shifts in consumer behaviour, economic structure, and commodity composition.  
    • Additionally, evolving data compilation methods may require the incorporation of new classification systems and data sources. 
    • As such, revisions ensure that the GDP figures reflect the current economic reality. 
  • Impact on Economic Indicators: When new data sets are incorporated through base year revisions, it can lead to adjustments in GDP levels.  
    • These changes have a ripple effect on a wide array of economic indicators, including trends in public expenditure, taxation, and public sector debt.  
  • International Standard Practice: United Nations-System of National Accounts 1993 requires countries to revise computation practices from time to time. 
• Frequency of Base Year Revisions: The base year should ideally be revised every 5 to 10 years to keep national accounts in line with the latest available data. 
• History of Base Year Revisions: Since the first national income estimates were published in 1956 with FY 1949 as the base year, India has revised its base year seven times.  
  • The most recent revision changed the base year from FY 2005 to FY 2012. 

What are the Considerations for the New Base Year? 

• Formation of the Advisory Committee: In June 2024, MoSPI set up a 26-member Advisory Committee on National Accounts Statistics (ACNAS) to decide the base year for GDP data, under the chairmanship of Biswanath Goldar. 
  • The committee will also take a call on the alignment of GDP with other macro indicators like the WPI, CPI, and IIP.  
• Potential Base Years: The committee is leaning towards 2022-23 as the new base year for GDP, although 2023-24 is also under consideration. 
  • Year 2016 (Demonetisation), 2017-18 (ripple effects of GST) and 2019-21 (Covid-19) are not considered because of abnormal changes in the economy. 
• Utilising GST Data: Discussions are underway regarding the inclusion of the Goods and Services Tax (GST) database for GDP calculations to include new databases to capture a better picture of the economy. 
• Methodological Improvements: The advisory committee is also considering changing the composition of indices e.g., inclusion of ASUSE (Annual Survey of Unincorporated Sector Enterprises) and exploring the double deflation method to improve GDP measurement accuracy. 

Conclusion 

In light of past controversies surrounding India's GDP base year revisions, the current initiative by MoSPI to engage experts and establish an advisory committee underscores the necessity for a transparent and methodologically sound approach. The inclusion of updated data sources and rigorous methodologies aims to enhance the accuracy and reliability of GDP estimates.

Drishti Mains Question:

Explain the concept of a base year in economic measurements. Why is it essential for accurately interpreting GDP data?

UPSC Civil Services Examination, Previous Year Question (PYQ) 

Prelims

Q. A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”? (2011) 

(a) It is the impact of drastic deficiency in supply due to failure of crops 

(b) It is the impact of the surge in demand due to rapid economic growth 

(c) It is the impact of the price levels of previous years on the calculation of inflation rate 

(d) None of the statements (a), (b) and (c) given above is correct in this context 

Ans: (c)

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Mains

Q. Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (2021)