At 6.9% growth, new GDP formula gives Chidu's budget a post-facto boost

The new method to calculate the country’s GDP by changing the base year for computing national accounts has pushed up the economic growth rate for 2013-14 to 6.9 percent, while earlier estimate on the basis of old series was 4.7 percent. This would obviously bring some cheers to the UPA but it is a tad bit late in the day for the Congress-led political conglomerate. From now on, the Central Statistical Office will measure gross domestic product (GDP) by the gross value added (GVA) method – a way of calculating GDP at basic prices instead of at factor cost. The chairman of the National Statistical Commission, Pronab Sen, and former Chief Statistician to the government, explains what it means and why India has shifted to this system in this interview with Seetha. Edited excerpts:[caption id=“attachment_180476” align=“alignleft” width=“380”]  National Statistical Commission, chairman, Pronab Sen. Image courtesy PIB[/caption] How is GVA at basic prices different from gross domestic product at factor cost? There is only one GDP – at market prices. This is divided into several components. First, what the factors of production get – wages, profits, rents. Then what the government gets – net indirect taxes. Factor cost measures the first three buckets, but not the fourth. That is supposedly what is accruing to the various factors of production. The question is for whom is that data or information useful. What is important from the point of view of the producers is what they get. Of these three, there is the component of taxes and subsidies which have to be paid whether production takes place or not. Property tax and stamp duties are classic examples. These are costs. This is not something that is happening after the product is sold. So for the producer, these production taxes must be kept in. So for macro economic purposes, you would be using GDP at market prices, and for producers as a class they would be using GVA at basic prices. The GDP is at market prices; the difference is only the net product taxes, that is taxes that are collected only when a product is transacted – excise, VAT and GST, when it comes, and service tax. These are not paid until the output is transacted. That’s also the case with input subsidies, which are not given until the transaction takes place. That component which is linked to the transaction is still omitted (because it is borne by the consumer) from GDP. So what is left is the GVA, a part of which the government continues to get and a part of which is going to the factors of production. In a sense, GDP at factor cost was an incomplete measure. And internationally nobody uses that term. It is GDP at market prices. If at all you do it at factor cost, it is called GVA at factor cost. Using GVA will make our methodology comparable to that of developed nations, because none of them uses factor cost. What will be the change from the existing GDP calculations? Whatever you had as GDP at factor cost, net production taxes (production taxes minus production subsidies) will be added to that. Why were we the only ones to follow the factor cost approach for so long? One of the reasons is that our entire national income system comes from the product floor approach. The United Nations System of National Accounts recommended the basic prices approach in 1993 but it was not made mandatory. In 2008, they said everyone must move to it. Why has it taken us so long to shift? It disrupts comparability. So finally we said at some stage we have to make a break, might as well make it (now). Will the GVA methodology make GDP size larger? Not necessarily. That depends upon how much your production taxes are and how much your production subsidies (interest subventions and some minor instances like labour subsidies, apprentices) are. It can go either way. If subsidies are larger, then GDP will come down. If taxes are larger, it will go up. This is coming along with base revision, which pushes up the GDP. That doesn’t have to be the case.   When you do a base change, the value added gets pushed up in some sectors and pulled down in others. New sectors get added, which pushes it up. The big thing that happens when you do a base change is not upward or downward revision of GDP. What tends to happen is that the sectoral proportions change. In our system, you should not expect too much change either way. In the last three base revisions, GDP size has gone up twice but in very small amounts. The maximum increase has been 6.5 percent. We are conservative. What will be the impact of GVA estimation on GDP and growth rates? I can’t say. The timing seems rather convenient. There is a feeling that it will help show better fiscal deficit numbers. This date was set two years ago. It’s been in the works for a couple of years. We didn’t even know there was going to be a change in government then. Are the data systems in place to switch to the GVA system? That is why it is being done. Basically we have all the NSS (National Sample Survey) data, which gives us the basis. For 2011-12, we have the consumer expenditure survey, and employment-unemployment survey. In 2012-13, we have the enterprise survey. All the surveys you need to calculate this are all there.