There seems to have been an overestimation of GDP output over the last 17 years, and the services sector output in particular. Measurement of service sector value added is plagued by problems of measuring the output of intangibles and separating stocks from flows.

A. Srinivas

Bangalore, Feb. 24 The advance estimates of economic growth, released by the Central Statistical Organisation, could be on the higher side. This is on account of possible overestimation of total value added, and services sector output in particular, in a high inflation year.

Studies point out that the gross domestic product (GDP) deflator – used to compute value added at constant prices – tends to be lower than the prevailing rate of inflation; particularly in the case of services, growth is prone to overstatement.

Wholesale price index inflation was 5.1 per cent in 2007-08 (average reading of WPI index in 2007-08 as compared to the average reading in 2006-07), as against 9.5 per cent in July-December 2008.

The consumer price index rose by about 6.5 per cent in 2007, against about 7.5 per cent in 2008. If the GDP deflator for services does not account for this rise, output growth would be overestimated.

A paper by R. Nagaraj, ‘Is Services Sector Output Overestimated? An Inquiry’ (Economic and Political Weekly, January 31, 2009) observes: “Between 1950-51 and 1990-91, implicit GDP and services sector GDP deflators moved in perfect unison. Thereafter, however, the services sector deflator rose at a slower rate than the GDP deflator, with a further slowdown after 2002-03.”

If the services deflator had been the same as the GDP deflator (as was the case in the previous four decades), then the services sector output annual growth rate between 2002-03 and 2006-07 shrinks from 9.3 per cent to 7.6 per cent, the paper says.

There seems to have been an overestimation of GDP output over the last 17 years, and the services sector output in particular.

Apart from the issue of accounting for price rise, measurement of service sector value added is plagued by problems of measuring the output of intangibles and separating stocks from flows.

Output growth in 2008-09 in the case of trade, hotels, transport and communication, financial sector and real estate, and community and social sector has been estimated at 10.3 per cent, 8.6 per cent and 9.3 per cent, respectively. These sectors grew by 10.1 per cent, 12.4 per cent, 11.7 per cent and 6.8 per cent, respectively, in 2007-08.

Taking the case of the communications sector, where prices have indeed declined, the price deflator nearly halved in seven years between 1999-00 and 2006-07.

The paper disputes the extent of the fall, on the basis of comparisons with US, Japan and Korea, which have led the technological advances in the communications sector.

‘Prone to error’

Value added is computed for the public sector, private corporate sector and unorganised sector. Mr S.L. Shetty points out in a ‘Status Paper on Database Issues of the Services Sector’ (EPW, September 15, 2007) that the output estimates of the private corporate sector and unorganised sector are prone to error.

The RBI sample of companies is small and non-random, on the basis of which extrapolations are made. The share of the unorganised sector in services output and total value-added is put at 55-60 per cent.

The estimates of the number of workers in each sector as well as value added per worker are questionable. In this case, the Economic Census, conducted every five years, is used as a benchmark, along with follow-up surveys.

Add to this the fact that the rise in government spending, reflected in a 9.3 per cent rise in community and social services in 2008-09, does not necessarily suggest value addition, and the recent growth numbers can be consumed with a pinch of salt.

(This article was published in the Business Line print edition dated February 25, 2009)
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