Govt to release revised estimates of GDP with new base year

The new measurement will set the base year as 2011-12 as opposed to the earlier 2004-05

Revised estimates of the gross domestic product (GDP), which are expected to be released later on Friday, is likely to show an increase size of the Indian economy by around 6 per cent to an estimated $1.8 trillion in 2013-14, says India Rating and Research (Ind-Ra), a Fitch group company.

Since the new base year is 2011-12, the revision would be made for 2012-13 and 2013-14 GDP numbers.

Every five years, the Ministry of Statistics and Programme Implementation (MOSPI) updates the base year of its GDP calculations. The current GDP estimates use 2004-05 as the base year which the government is changing to 2011-12.

In two of the last three base year changes, when the base year was changed to FY94 from FY81 and to FY05 from FY00, the size of economy changed significantly, while in the third case it did not change much. This time with the change in base year, Ind-Ra expects the size of the Indian economy to increase to Rs 111.7 trillion or $1.8 trillion in FY14.

It should be noted that any revision in the base, theoretically, should not lead to change in size of the economy. It is so because change in base does not alter GDP in nominal terms. However, the increase in the GDP size comes mainly due to the use of more up-to-date information in the compilation and estimation of national accounts. This is because new goods and services keep entering the system.

For example the 2004-05 base would not have captured the production of LED TVs which did not exist at that time. The change in base year will incorporate information from latest data sources such as the Census 2011, National Sample Survey Organisation’s (NSSO) employment-unemployment and Consumer Expenditure Surveys for 2011-2012, the debt and Investment Survey of 2013, the Annual Survey of Industries (ASI) 2012-2013 and the all India Livestock Census 2012.

With an increase in the size of the GDP, indicators such as the fiscal deficit and current account deficit which are expressed as a percentage of GDP are likely to decline to 4.3 per cent from 4.6 per cent of GDP in FY14 and from 1.7 per cent to 1.6 per cent of GDP respectively. While this does ease the fiscal deficit constraint, Aditi Nayar, chief economist at ICRA cautions, saying that compliance with fiscal targets should be assessed in absolute terms, for instance, comparing the Central Government's fiscal deficit for 2014-15 to the budget estimate of Rs.5.3 lakh crore.

However, fiscal deficit or current account deficit is expressed as percentage of GDP since it becomes difficult to compare absolute numbers with previous year figures and hence setting the target becomes difficult.

The Ind-Ra estimates however do not take into account changes due to the Annual survey of industries for 2012-13. For initial estimates of industrial growth, the government relies on the Index of Industrial Production (IIP) data which is largely collected from the a organised sector. But the ASI data is a more comprehensive set than the index of industrial production (IIP), as it encompasses small and medium industries as well, covering all units that employ at least 10 workers and use power or 20 workers but do not use power. But as these results come out with a considerable lag, IIP estimates are used in the interim. These estimates undergo changes when the results of annual survey of industries are available.

The latest ASI data shows that gross value added in the manufacturing sector grew at 3.9 per cent in 2012-13. This is lower than the growth of manufacturing used for computing GDP in 2012-13 which was 6.85 per cent. This would suggest that GDP growth could be revised downwards. But Madan Sabnavis at Care says that there is not a one on one correspondence between ASI and GDP data. This is because ASI data does not include net indirect taxes and subsidies and other adjustments are often made.

With the revision in base, Ind-Ra further expects the Indian economy to become a three trillion dollar economy by the end of this decade. On the previous base, this milestone would have been achieved a year later.