The case of IMF's two set of GDP numbers

A primer on how GDP figures at factor cost and market prices are calculated

The figure for India’s gross domestic product (GDP) announced by International Monetary Fund (IMF) shocked even the most conservative of analysts. At less than 4 per cent (as highlighted in most of the places), it was nowhere close to the estimate of even the most bearish of economists.

IMF, for the first time, has announced two set of GDP numbers. The World Economic Outlook released by IMF says that India’s GDP at factor cost is projected to be 4.25 per cent in 2013 (FY14). For 2012 (FY13) GDP at factor cost stood at 5 per cent.

As per the second set of number (which was announced for the first time) GDP which is measured at market prices (including indirect taxes) pegged India’s growth at 3.75 per cent against its earlier prediction of 5.6 per cent. This number was generally picked up and highlighted in media.

While the sharp decline in the GDP estimate is glaring, the disclosure of the two numbers added to the confusion. The difference of 0.5 per cent between the two GDP numbers is the root cause of confusion.

How and why do these two numbers vary? Now, the GDP is defined as the total value of all goods and services produced in a country during a year.

To understand the different types of GDP numbers let’s take an example.

When we eat in a restaurant, the price is quoted on the menu card for every food item. But when the bill arrives after we are through eating, the total includes a new element called service tax.

When GDP is calculated using the factor cost method, it will include the prices on the menu card for the eatables consumed. But when it is calculated using the market price method the bill amount, which includes the service tax, will be considered.
GDP by market price method also takes into account the impact of subsidy. Say when rice is sold after the passage of food security bill at Rs 2 per kg, its cost to the government which includes the procurement price of Rs 13.45 per kg plus the storage and distribution cost works out to over Rs 16 per kg. Thus the subsidy element works out to Rs 14 per kg.

When GDP at factor cost is calculated, it will take into account Rs 16 per kg of rice but when GDP at market value is calculated, Rs 2 per kg will be considered.

Is it to gauge the impact of food security bill on the GDP that IMF announced two set of numbers?

We may not know IMF’s rationale for announcing two set of numbers, but a widening difference between the two numbers will reveal the cost of populist measures on the economy.