Just ahead of Budget 2015, let’s see growth numbers differently

The recent move by Central Statistics Office (CSO) to revise the base year for calculating the country's macroeconomic variables to 2011-12 from 2004-05, which was the base year for previous estimates, has dramatically and significantly changed gross domestic product (GDP) numbers which have been trailing for the last couple of years. No wonder, the previous UPA government received a lot of flak for it. As per the revised approach, the country’s economy grew at a more-than-impressive rate of 6.9% in the year that ended March 31, 2014 compared to a mere 4.7%, the lowest in many years, as per the previous calculation.

One may wonder what actually base year revision is and how it differs from annual revisions. Well, in case of annual revisions, while changes are made on the basis of updated data, no changes are made in the conceptual framework; this allows the year under analysis to be strictly compared with the previous ones. In the case of base year revision, in addition to measuring growth compared with the base year, conceptual changes as per international guidelines are incorporated. This means that the 6.9% growth measured by the revised approach is not comparable with the 4.7 % arrived at previously. Therefore, the new method throwing up fresh GDP numbers doesn’t mean that the economic growth actually accelerated last year.

The second major feature of the new approach— recommended by the United Nations System of National Accounts (UNSNA) in 2008 (the US body had suggested revision of the base year of all economic indices every five years)—is that CSO will start measuring the country’s economic growth by gross value-added (GVA) at basic prices, replacing the practice of measuring it by GDP at factor cost.

The new method reduces the gap between the way the country calculates GDP and the methodology used by the International Monetary Fund and makes India’s GDP growth numbers comparable with that of developed nations.

The change in base year results in a surge in the size of the country’s economy in 2013-14 to Rs 111.7 trillion against the earlier estimate of Rs105.4 trillion. Fiscal deficit and current account deficit for 2013-14 also fall to 4.3% of GDP, compared with 4.6% previously, and 1.6 % (1.7% previously), respectively.

As per the new method, the economy is estimated to have grown at 7.4% for the fiscal year 2014-15 ending in March while growth surged to 7.5% in the third quarter ended December 31, 2014 over the year-ago period. As per revised estimates, India has surged ahead of China which is estimated to have grown its GDP by 7.3% in the last quarter of 2014.

The new method and the resultant changes in growth numbers will give a leg-up to Prime Minister Narendra Modi and Finance Minister Arun Jaitley to aggressively sell the country’s attractiveness from an investment perspective as the government tries hard to leverage its ‘Make In India’ campaign. The new set of numbers also gives ammunition to the previous UPA regime to claim that it actually succeeded in managing fiscal consolidation, containing current account deficit, moderating inflation and putting the economy back on the growth path, contrary to the change that it had led the economy into a mess. While the measurement change will lead to higher GDP, it is a bit too early to ascertain the exact impact it will have on the country’s economy.
(Image: BCCL)