Improving GDP calculations: Why accurate national accounts matter

Methodology concerns must be addressed in the new seriesAttention to India's national accounts statistics is overdue, and it is welcome news that the government is taking steps to bring it up to date

Union Minister for Statistics and Programme Implementation Rao Inderjit Singh informed Parliament earlier this week that his ministry had set up an advisory committee on the national accounts. Members of this committee, which included representatives from the Reserve Bank of India as well as state governments, would advise the government in particular on the methodology by which India’s gross domestic product (GDP) is calculated, with a view to updating the calculation of GDP and shifting its base year from 2011-12, as it is at present, to 2022-23. Attention to India’s national accounts statistics is overdue, and it is welcome news that the government is taking steps to bring it up to date. The committee’s working and its report should be transparent, and open to public comment and consultation.

 

In its work, the committee must recognise that several criticisms  of the current GDP series are not without foundation. For example, it has been noted that the deflator plays an outsize role in the variability of GDP from one quarter to another. But the most consequential perhaps is the concern over its estimates of value added from the private sector. This currently extrapolates from the data collected by the Union Ministry of Corporate Affairs (MCA). The MCA data has thrown up some oddly counterintuitive results in recent years, which have cast a shadow on the broader utility of any statistics that incorporate them. When earnings, credit growth, and industrial-capacity utilisation do not move in sync with the GDP component built up from the MCA data, then naturally such doubts will multiply. The data itself has been questioned, given some companies may be misclassified or are untraceable, though the official statisticians insist the effect of this would be marginal. New mechanisms might have to be found for this estimation — perhaps the data based on the collection of goods and services tax (GST) could be mined for possibilities.

 

However, the GST data would not necessarily solve the broader problem that has plagued India’s estimation of the private-sector value-added component in GDP: The size of the informal sector. There might be methods, however, to gauge the changes in the size of the sector by estimating the metaphorical shadow it casts on the formal sector, which pays taxes. Yet this is a moving target as the increasing impact of GST itself brings differences in the size of the informal sector. Finding a suitable method to measure the informal value-added component of economic activity in India must be a priority for the committee. When the latest GDP series was introduced, its credibility suffered partly because there was limited comparability with previous years. This can be solved in the next iteration of GDP calculations by clearly creating a back series, using the chosen method — to the extent that this is possible, given that some of the data being used might be relatively novel. Such a back series would certainly restore the flagging image of the Indian national accounts. Even better would be the creation of a suitable producer-price index that can transparently inform the calculation of the GDP deflator. Such improvements would vastly increase the quality of data that feeds into policymaking and investment decisions in India.