Changes:
- Base changed from 2004-05 to 2011-12
- Calculated at market prices i.e. includes indirect taxes and excludes subsidies.
Controversy:
- GDP numbers as per new series are not in consonance with other numbers like IIP, corporate financial statements, credit numbers etc.
Recently the measurement of India’s gross domestic product (GDP) was tweaked to conform to international standards. But, according to economists this method has created some discrepancies. What are these discrepancies and why are they caused? Explain. (150 Words)
Recently two changes were introduced in India’s gross domestic product (GDP) calculation.
- First, the base year for GDP calculation was updated.
- Second, the measurement will now be done at gross value added (GVA) at market prices and not at factor costs. This means that subsidies would not be added and taxes would not be deducted from the gross value.
The change, however, has caused some discrepancies in GDP numbers. The breakup of the GDP, i.e. calculating the GVA by individual sectors and adding them up, does not match with its headline number. Further, the discrepancy has increased from .1% of GDP (at factor cost) to 1.2% of GDP (at market prices).
This is due to the following reasons:
- The data quality of GDP at market prices, for headline number as well as individual sectors, is not accurate given it is a newly adopted practice.
- Upgradation of base year has added greater share for certain sectors such as manufacturing into the GDP causing the earlier discrepancies at factor cost to inflate.
- Inclusion of production taxes which are levied even if the final product is not there (such as property tax) in the GDP calculation has also caused inflation of discrepancies