SLATE. All you wanted to know about: Calculating GDP

Suddenly the Indian economy is looking much better than it did two weeks ago, thanks to a little sleight of hand. The Government’s statistics wing made two changes to the GDP calculation last week which have had the happy effect of lifting growth to 6.9 per cent for 2013-14 instead of 4.7 per cent as estimated earlier.

There have been two changes to the GDP calculations. One was a change in the base year for the calculation which is done routinely every five years or so. The other was to adopt a new method to measure output. But why make any changes?

Starting now, Indian GDP will be measured by using gross value added (GVA) at market price, rather than factor cost. If you are not an economist, the previous sentence may have sounded like it’s in Swahili. Simply put, GDP is the total value of goods and services produced within the country during a year. You take all final finished goods and services produced domestically in volume terms and multiply this by their market prices to arrive at the value of output. Intermediate goods need to be excluded to avoid double-counting.

In India GDP did not include what that the Government received . Now, what the it earns by way of indirect taxes such as sales tax and excise duty after deducting subsidy is also added into the GDP.

You can question the timing, but the change in method of calculation has brought Indian GDP calculations more in line with global practise. For example, IMF’s world economic outlook projections, which all of us used even recently to make India-China comparisons, are not based on factor costs. This used to create confusion in the past, with IMF’s projections turning out to be very different from the Government’s.

As for the base year change, it is the only way to ensure that the products and services included in the GDP calculation do remain contemporary and reflect the present state of the economy.

For instance, the latest change in base year from 2004-05 to 2011-12 has included the recycling industry which didn’t figure in the earlier GDP computations.

imilarly trading activities by manufacturing firms are now included in that sector’s share. This change along with better data compilation (online data filed with the Ministry of Corporate Affairs) has led to manufacturing increasing its share in GDP.

Global investors use growth prospect numbers to allocate their investment allocations between countries - GDP is a key metric here. So news that India’s GDP growth has averaged 6 per cent for the last three years and not 4.6 per cent as thought earlier, may help investors view India in a more favourable light.

Let’s not forget that important indicators such as the fiscal deficit are measured as a ratio of GDP too. Economists say that the latest revisions will help the Government meet this year’s fiscal deficit target. A more comfortable deficit number could help the Government stop tightening its belt and consider budget sops.

With indirect taxes added and subsidies deducted under the new GDP calculations, there is more incentive for the Government to raise indirect taxes and reduce subsidies. This may have an impact on sectors such as agriculture which receive a lot of subsidy.

It’s not always the economy, stupid. It’s sometimes the calculation.

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