The great GDP fudge -The Indian Express News: After the new GDP series was rolled out under the current government, it r evealed that India’s GDP growth in 2013-14 2013-14 was 6.9 per cent compared to the reported 5 per cent, as per the old methodology. A 6.9 per cent GDP growth in 2013-14 would have meant that India was the second fastest growing large economy in the world, after China. But the CEA expressed bewilderment at that number because he said this was in dissonance with the actual macro-economic reality. He explained meticulously how other economic parameters such as imports, gross capital formation etc are truer indicators of GDP growth and dismissed the view that India’s GDP could have grown as fast in 2013-14.
The Government’s statistics wing made few changes to the GDP calculation which lifted lifted the growth to 6.9 per cent for 2013-14 instead of 5.1 per cent as estimated earlier. The country recently changed the way that it calculates it. Thus the recently made changes in the GDP computation methodology resulted in an increase in the GDP figures, marking it as a year of sharp recovery rather than continuing stagnation, and putting India’s growth rate much closer to China’s.
Change in GDP calculation Methodology Mainly, the changes made in the calculation methodology which resulted in a better GDP are -Switching it to a market-price calculation of GDP - Shifting of base year of GDP calculation from 2005 to 2012.
Market Price: According to the government, from now on the benchmark measure of economic growth will be based on market prices, and not on factor costs. The factor cost method calculates economic activity based on the costs of production, on the other hand, the market price method is based on the amounts paid by consumers. Most countries and international bodies calculate GDP based on market prices. In India GDP did not include what that the Government received. Now, what it earns by means of indirect taxes such as sales tax and excise duty after deducting subsidy is also added into the GDP.
Base Year: The revised calculation methodology also includes a lot of data on corporate activity and newer surveys of spending by households and informal businesses. The change i n the base year for the calculation is done routinely. According to experts, as for the base year change, new products and services are included in the GDP computation to capture the structural changes. So it is the only way to ensure that the products and services included in the GDP calculation do remain contemporary.
Benefits of Change: The change in method of calculation has brought Indian GDP calculations more in line with global practice. Global investors generally use growth prospect numbers to allocate their investment allocations between countries. So news that India’s GDP growth has averaged 7 per cent for the last three years and not 5 per cent as thought earlier, may help investors view India in a more favourable way. Also, that important indicators such as the fiscal deficit (a government's total expenditures exceed the revenue that it generates, excluding money from borrowings) are measured as a ratio of GDP too. With indirect taxes added and subsidies deducted under the new GDP calculations, there is more incentive for the Government to raise indirect taxes and reduce subsidies. This may have an impact on sectors such as agriculture which receive a lot of subsidy. GDP is the short form for Gross Domestic Product. This is the most often used term to measure National Income accounts, which is a measure of how much product (or income in terms of goods and services) a country generates.
Concept and Measurement of GDP (National Income): One of the most significant measurements of economic growth is national income. The modern economy is enormously complex, involving innumerable transactions of a wide variety of goods and services. To understand, analyse and regulate the behaviour of such an economy we need some indicators or measures of its performance in almost the same way as any business enterprise needs certain types of accounts to measure and evaluate its performance. National income represents the aggregate income of a nation as against the income of an individual. A number of specific problems or issues arise when we try to define and measure the national income of any country. However, national income can be defined as t he aggregate money value of the annual flow of final goods and services in the national economy. Calculating GDP is extremely important has the performance of the economy is fixed by means of this method. The results would help the country to forecast the economic progress, determine the demand and supply, understand the buying power of the people, the per capita income, the position of the economy in the global arena. The Indian GDP is calculated by the expenditure method. By Calculating GDP the performance of the economy can be determined. The GDP of the country states the number of goods and services produced in a financial year. GDP plays an important role in formulating economic policy and setting priorities in any country. The two broad measurements of representing the national income are GDP and GNP.
Measuring National Income: There are various ways of measuring the national income such as Output method, Income method and Expenditure method.
The basic approach to estimating national income is to measure the two kinds of flows that economic activities generate, i.e. product flow and money flows. The money flows can be looked upon as factor payments, and as payments for goods and services. Accordingly, there are three approaches to measuring national income. Product flow approach, factor income approach, and expenditure approach. Based on these approaches, there are three methods o f measuring national income:
1. Net product method (Production method) 2. Factor income method, and 3. Expenditure method.
Typically, GDP is measured by segregating the economy into 3 broad categories: agriculture, industry, and services. In India, agriculture GDP is measured both inclusive and exclusive of GDP in forestry, fishing and logging, apart from GDP from cultivation.
GDP = private consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X − M).
"Gross" means that depreciation of capital stock is not subtracted out of GDP. If net investment (which is gross investment minus depreciation) is substituted for gross investment in the equation above, then the formula for net domestic product is obtained. Consumption and investment in this equation are expenditure on final goods and services. The exports-minus-imports part of the equation (often called net exports) adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic area (the exports).
“C” stands for consumption which includes personal expenditures pertaining to food, households, medical expenses, rent, etc. “I” stands for business investment as capital which includes construction of a new mine, purchase of machinery and equipment for a factory, purchase of software, expenditure on new houses, buying goods and services but investments on financial products is not included as it falls under savings.
“G” stands for the total government expenditures on final goods and services which includes investment expenditure by the government, purchase of weapons for the military, and salaries of public servants.
“X” stands for gross exports which includes all goods and services produced for overseas consumption. “M” stands for gross imports which includes any goods or services imported for consumption and it should be deducted to prevent from calculating foreign supply as domestic supply.
Gross national product (GNP) is sometimes used as an alternative measure to gross domestic product. In order to compare multiple countries, the statistics may be quoted in a single currency, based on either prevailing exchange rates or purchasing power parity. Then, in order to compare countries of different population sizes, the per capita figure is quoted. To compensate for changes i n the value of money (inflation or deflation) the GDP or GNP is usually given in "real" or inflation adjusted, terms rather than the actual money figure compiled in a given year, which is called the nominal or current figure.
Economic growth is an increase in activity in an economy. It is often measured as the rate of change of gross domestic product (GDP). Economic growth refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced. Economic development, a related term, refers to change in the way goods and services are produced; positive economic development involves the introduction of more efficient or "productive" technologies or forms of social organization. Calculating the real GDP growth allows to determine if production increased or decreased, regardless of changes in the purchasing power of the currency.
