Ind-Ra: Increase in Economic Size by Base Year Change is a Methodological Issue

The base year change of National Accounts Statistics to FY12 from FY05 will result in an increase in the size of Indian economy in FY14 to INR111.7trn as against the earlier estimate of INR105.4trn, says India Ratings & Research (Ind-Ra). The agency opines that a base year change is a regular and methodological issue.

The FY14 fiscal deficit and current account deficit are likely to decline to 4.3% of GDP (4.6% earlier) and 1.6% of GDP (1.7% earlier), respectively. The agency further expects the Indian economy to become a three trillion dollar economy by FY20 with the change in base to FY12. On FY05 base, this would have happened a year later that is in FY21.

The base year change is in line with the system of national accounts, the internationally agreed standard set of recommendations to compile measures of economic activity in accordance with strict accounting conventions based on economic principles.

A change in base year implies (a) changing price and quantity base for individual price and quantity relatives and (b) updating the weights used in aggregating individual quantity relative to sub-indices and to aggregate these sub-indices into more aggregated indices. One common aspect of base/methodological change is an increase in the size of economy in relation to the existing base/earlier methodology.

The increase in the size of an economy with a change in the base year is not limited to India only. Even in the UK, changes in the methodology and base year in 2014 resulted in an average 4.1% increase in the economic size over 1997-2013 (annual difference between earlier and new estimates vary from 2.6% to 6.2%).

Of the last three base year changes, while the size of economy changed significantly in two cases, it did not change much in one case. The growth impact of a base year change both in India and recently in UK has been minimal. The reason for the increase in size of the economy is the usage of more up-to-date information for these estimations. A higher change in the estimation of an economy signifies the occurrence of a rapid change in the economy, which the previous basket of goods and services and the weights used to estimate the size of the economy were not capturing correctly and vice versa.

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