GDP calculation and base year

The Central Statistics Office (CSO) is considering changing the base year from 2011-12 to 2017-18 for calculating gross domestic product (GDP) in the country. According to the Chief Statistician, this work will be done as soon as possible after the Consumer Expenditure Survey (CES) and the Annual Survey of Industries (ASI). Significantly, GDP is mainly used as a scale to measure the growth of a country. While calculating the growth rate of the country, the base year is used to know the real state of the economy. Be aware, currently India is using 2011-12 as the base year.

What is the base year?

  • The base year is a type of benchmark in terms of which national statistics such as gross domestic product (GDP), gross domestic savings and gross capital formation are calculated.
  • Gross domestic product or GDP is the total value of all goods and services produced in a country. It is known that there are mainly 2 types of GDP: (1) nominal GDP and (2) real GDP.
  • Nominal GDP: It measures the value of all goods and services expressed at current prices (prevailing current year’s prices).
  • Real GDP: Unlike nominal GDP, it refers to the value of all goods and services expressed at the prices of a base year.

gross domestic product
gross domestic product

  • Base year prices are assumed to be constant, while changes in current year prices are possible.
  • Generally, the base year is a representative year and at the time of its election, care is taken that no major economic and natural events, such as floods, droughts or earthquakes, etc. have occurred in that year.
  • It is also kept in mind while choosing the base year that it is near the current year, so that the true state of the economy can be assessed. It is worth noting that keeping in mind this requirement, the base year is changed every 7 to 10 years in the country.
  • Generally, the change in the base year also leads to a marginal increase in the GDP of the country.

History of use of base year

  • The first estimate of national income in India was published by the Central Statistical Organization (CSO) in the year 1956, it is notable that 1948-49 was used as the base year.
  • Along with improving the availability of data, changes were made in the methodology of calculation. Until this time, the CSO relied on population figures in the national census to estimate the workforce in the economy, due to which the base year also corresponded to the years in which the census data were released, eg 1970-71, 1980- 81 etc.

base year
base year

  • Subsequently, the CSO found that the National Sample Survey (NSS) data is more accurate than the census data on the size of the workforce and began to be assessed based on the NSS data.
  • It is known that this system was introduced in the year 1999 when the base year was revised from 1980-81 to 1993-94.

Change in base year required

  • Changes happen in every economy from time to time and these changes have a great impact on the growth and development of the country. According to experts, the base year of the assessment needs to be periodically revised to reflect these structural changes within the economy (eg, the increasing share of services in GDP).
  • Apart from this, another objective of changing the base year for calculation of GDP is to collect accurate economic data as per the current situation. Because in the absence of accurate data, it is not possible to create welfare schemes within the economy.
  • Based on the year 2011-12, GDP does not reflect the current economic situation correctly, while in relation to the new base year series, experts believe that it is the United Nations National Account Guidelines-2018 (United Nations Guidelines in System). of National Accounts-2018).
  • Significantly, different countries of the world use different standards to revise the base year.

Base year dispute

GDP
GDP

  • It is important to note that the last time the base year was revised in 2015 after which the current GDP figures remain controversial due to the methodology and data of estimation in the last four years.
  • According to official figures, the GDP growth rate for the first quarter of the financial year 2019-20 has reached 5 percent, while some independent researchers on the subject estimate the country’s GDP to be 2.5 percent higher than 0.36 percent in the last few years. has gone.
  • Similarly, the academic paper of Geeta Gopinath, Chief Economist of International Monetary Fund (IMF), showed the adverse effect of demonetisation on the country’s growth rate. Yet the country’s official GDP grew by 8.2 percent in 2016-17, the highest in a decade.
  • According to many economists, this problem lies in the method of estimation and the data used to estimate the contribution of the private corporate sector.
  • Significantly, the CSO relies on the data of the Ministry of Corporate Affairs to estimate the contribution of the private sector to the economy and many economists have called the figures of the Ministry unreliable. It is therefore possible that private sector production has been measured higher than reality.
  • The private sector is responsible for about one-third of the country’s GDP.
  • A study conducted by the National Sample Survey Office (NSSO) last year revealed that about 42 percent of companies in the list of active companies in the Ministry of Corporate Affairs could not be tracked.

The conclusion

The proposal to consider 2017-18 as the base year is a welcome move, although the current GDP estimation methodology and data disputes cannot be ignored. Even after the change in the base year, the doubt will remain until the methodology of estimation is improved and the reliability of the data will not be ensured. In view of the current problems, it is proposed to set up an independent commission of national and international experts to review the GDP methodology.

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