Revised method for GDP calculation

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The changes have been made, based on the UN Systems of National Accounts

Theory

GDP at basic prices: Equals GDP at market prices, minus taxes and subsidies on products.
GDP at Factor price: GDP(MP) -Indirect Taxes + Subsidies
GDP at market prices: The gross value at market prices of all goods and services produced by the economy, plus taxes but minus subsidies on imports.
Gross Value addition:GVA = GDP(MP) + subsidies - (direct, sales) taxes Over-simplistically, GVA is the grand total of all revenues, from final sales and (net) subsidies, which are incomes into businesses. Those incomes are then used to cover expenses (wages & salaries, dividends), savings (profits, depreciation), and (indirect) taxes.
Three methods for calculating GDP : - Output approach, expenditure approach & value addition.

The revised method

  • India's GDP was calculated with base year 2004-05. Base year changed to 2011-12.
  • GDP measure of economic growth will henceforth be based on market prices, not on factor costs. The latter method, which India had previously preferred, tabulates economic activity based on the costs of production, whereas the other method is based on the amounts paid by consumers. Most countries and international bodies calculate GDP based on market prices.
  • In the new definition of the economic growth, GDP is estimated at market prices, which includes indirect taxes but excludes subsidies. Earlier, GDP growth was estimated at factor cost, which excludes indirect taxes but includes subsidies.
  • an intermediary concept called GDP at basic prices has been introduced covering value added at factor cost plus indirect taxes on production, net of production subsidies.
  • The difference between GDP at factor cost and GVA (Gross Value Addition) at basic prices is that production taxes are included and production subsidies excluded from the latter.
  • production taxes are imposed even if the products are not produced, such as property. However, excise duty, value added tax etc are all product taxes. Similarly, product subsidies would not include interest subsidies, which will form part of production subsidies. Now, GDP at market prices would come by adding product taxes and deducting product subsidies from GVA at basic prices.
  • more widespread coverage of the private corporate sector in manufacturing and services by the use of the annual accounts of companies as filed with the Ministry of Corporate Affairs, instead of the data from the Reserve Bank of India’s (RBI) sample studies, seems to have made some fundamental difference to the NAS
  • two kinds of approaches — establishment and enterprises — are used in calculating manufacturing production. Till now, only establishment approach was used which means calculating production plant by plant. On the other hand, in enterprises approach the activities at headquarters are taken into account. For instance, after an item is produced, various marketing and sales promotion efforts go at headquarters level. All these have been taken into manufacturing.
  • n the new GDP data, establishment approach is used for small companies as they have a few plants or sometimes a single plant. But, for large corporates, enterprises approach is used.

Result of new method

  • 2012'13's GDP growth rate is increased from ~4.7% to ~7%.
  • The updated calculation also suggests that manufacturing in the year ended March 2014 was a larger share of India’s economic activity than previously thought—18% instead of 15%—while real estate, hotels and financial and business services constituted a smaller share—51% instead of 60%. Agriculture’s contribution grew to 17% from 14% with the revision
  • Most significant perhaps is that the new series of national accounts shows that the rate of investment or the gross fixed capital formation (GFCF), as a percentage of GDP, has steadily fallen, from 33.6% in 2011–12 to 31.4% in 2012–13, to 29.7% in 2013–14 and finally to 28.6% in 2014–15.
  • The private corporate sector’s share in total domestic savings, which was around 23% in the two years according to the old series, has now risen to 29% in 2011–12 and 32% in 2012–13, and further to 36% in 2013–14. In the estimates of gross capital formation (GCF) or investment, the share of the private corporate sector in 2012–13 has shot up from 28.5% in the old series to 40% in the new series. The private corporate sector has now overtaken the household sector which was dominant in the older series.

Critics

  • RBI criticized Central Statistics Office (CSO) for confusing calculation of GDP
  • the credibility of the national income statistics has taken a hit as top economists were not kept in loop

Reference

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