IIP base revision to up FY11 GDP estimates to 8.9%: Crisil

Credit rating agency Crisil today said the revision of base year for calculating Index of Industrial Production (IIP) is expected push up GDP growth for 2010-11 to 8.9%, from the current estimates.

The final economic growth figures for the last fiscal are yet to be released. While the GDP estimates took into account IIP numbers, compiled by the Central Statistics Office (CSO), based on 1993-94 as the base year, the new figures are based on 2004-05.

"The revision in IIP calculation, a key component of GDP estimation, is expected to up the GDP estimates for 2010-11 from 8.5% to 8.9%," Crisil said in a statement.

Large revisions in GDP estimates in the recent years have led to questions on the robustness of these estimates. As the most important economic indicator, GDP estimates influence policy making, requiring accurate estimation, Crisil said in a study titled 'How robust is India's GDP estimate?'.

"Our study finds that the current method of computing GDP underestimates the size and growth of the Indian economy, and identifies four key issues with respect to accurate estimation of India’s GDP," Crisil said.

Earlier this month, RBI Governor D Subbarao also called for more accurate and tangible data on the services sector so that policymakers can arrive at a more reliable measure of the potential output of the economy.

Besides, IIP, with the outdated base-year of 1993-94, was being used to generate Industrial GDP. This failed to capture the fast changing industrial structure; hence the IIP base year has been revised to 2004-05 from June.

The IIP base year revision was just one of the many issues plaguing the GDP estimation, Crisil said, adding that the study identifies 3 other key issues.

First, the current methodology does not accurately measure the contribution of the unorganised sector. Secondly, estimation of service sector GDP is constrained by the absence of appropriate price indices to convert nominal GDP into real GDP. Thirdly, the GDP estimates do not account for improvement in the quality of goods.

The report said, nearly half of India's GDP originates in the unorganised sector, but the CSO surveys that capture this data are conducted only once in five years.

"Given the rapidly changing nature of the economy and increasing self-employment, the absence of annual surveys for the unorganised sector leads to incorrect measurement of its contribution to India’s GDP," it said.

In India’s rapidly evolving economy, many items like those related to computers and communications, have undergone significant quality improvement.

However, market prices under-state the value derived from this quality improvement. Hence, to accurately capture the value addition, the price indices should be lowered accordingly, Crisil said.