Mains Practice Questions

Approach

• Introduce the concept of GDP in the introduction and the new series announced.
• Explain the difference between computing methodology of GDP before and aftere the year 2015.
• Conclude suitably.

Introduction

GDP is a measure primarily used as a yardstick to gauge the growth of an economy. In 2015, a new series was announced to calculate India’s GDP by upgrading the methodology with new data sources to meet UN standards.

Body

Difference between old and new methodology:

• Change in Base Year
  
  • Pre-2015: 2004-05
  • Post 2015: 2011-12
  • Change of base year to calculate GDP is done in line with the global exercise to capture economic information accurately.
• Change in data used to measure manufacturing sector growth
  
  • Pre-2015: The performance of the manufacturing sector was previously evaluated using data from the IIP and the Annual Survey of Industries (ASI), which comprises over two lakh factories.
  • Post-2015: Now, firms’ annual accounts filed with the Ministry of Corporate Affairs (MCA 21) are used, which includes around five lakh companies.
• GDP at factor cost replaced by GDP at market price
  
  • Pre-2015: GDP at factor cost was calculated.
  • Post-2015: Adopted the international practice of GDP at market price and for sector-wise estimate, Gross Value added (GVA) at basic price.
  • The new measures include not only the cost of production but also product subsidies and Taxes.
• Calculation of labour income
  
  • Pre-2015: All labour used to be equal.
  • Post-2015: The new series has used a concept called “effective labor input”. Different weights are assigned on whether one was an owner, a hired professional or a helper.
• Change in the way value addition in agriculture was captured
  
  • Pre-2015: It was confined to value addition in farm produce.
  • Post-2015: Value addition in agriculture is now taken beyond farm produce.
  • Livestock data is now critical to the new method.
• Capturing income generated by Financial Sector
  
  • Pre-2015: Financial corporations in the private sector, other than banking and insurance, was limited to a few mutual funds (primarily UTI) and estimates for the Non-Government Non-Banking Finance Companies as compiled by RBI.
  • Post-2015: The coverage of financial sector has been expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.

Conclusion

The new method is statistically more robust since it estimates more indicators such as consumption, employment, and the performance of enterprises, and incorporates factors that are more responsive to current changes.