The Ministry of Statistics and Programme Implementation (MOSPI) is examining the possibility of updating the base year for GDP (Gross Domestic Product) computation. The current base year is 2011-12, and the potential new base year could be 2017-18. Switching the base year would permit more accurate year-to-year comparisons, give a clearer understanding of purchasing power fluctuations, and enable the calculation of inflation-adjusted growth estimates.
Origins of the Shift
The need for a base year change arises from a two-fold drive for precision and global alignment. To ensure accurate economic information capture, it is common practice globally to periodically update the base year used in GDP calculations. The previous series saw a change from 2004-05 to 2011-12. An updated base year of 2017-18 aligns India with United Nations guidelines within the System of National Accounts-2008. Generally, a base year should be updated approximately every five years to accurately account for transformations within the economy.
GDP Calculation in India Explained
In India, GDP encapsulates the total economic output from the consumer perspective. It comprises private consumption, gross investment, government spending, government investment, and net foreign trade (the difference between exports and imports). In 2015, the Central Statistics Office (CSO) chose to replace GDP at factor cost with GDP at market price. This was in line with international practices and was supplemented by the Gross Value Addition (GVA) measure for a more accurate estimation of economic activity.
| GDP Components |
|---|
| Private Consumption |
| Gross Investment |
| Government Spending |
| Government Investment |
| Net Foreign Trade |
Gross Value Added (GVA)
GVA accounts for total output and income within the economy. It calculates the rupee value of goods and services produced in an economy, deducting the cost of inputs and raw materials utilised during production. The GVA measure provides a sector-specific analysis, illuminating growth patterns within areas, industries, or sectors of the economy. On a macro level, from a national accounting perspective, GVA equals a country’s GDP plus subsidies on products, minus taxes on products.
GVA versus GDP
While GVA offers a producer’s or supply-side perspective on economic activity, GDP presents the consumer’s or demand-side view. These two measures might not align due to differences in net tax treatment. GVA is generally considered a superior gauge of the economy because it can more accurately reflect the real economic scenario. For instance, GDP might be inflated by an increase in output due to higher tax collections, which could be driven by better compliance or coverage, rather than actual output increases. GVA, with its sector-wise breakdown, aids policymakers in determining which sectors need stimulation or incentives, thus helping formulate sector-specific policies. Meanwhile, GDP remains a crucial measure for cross-country analysis and comparison of different economies’ incomes.