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Critical Topics and Their Significance for the UPSC CSE Examination on September 23, 2024

Daily Insights and Initiatives for UPSC Exam Notes: Comprehensive explanations and high-quality material provided regularly for students

On the pitfalls of estimating GDP

For Preliminary Examination: Current events of national and international importance

For Mains Examination: GS III - Indian Economy

Context:

The ongoing GDP series is due for revision. The official agency is considering using GST data to estimate value addition. However, the agency should be careful to not apply unverified datasets and shaky methodologies without adequate testing and validations for GDP estimation

Read about:

What is Gross Domestic Product (GDP) ?

What is Gross Value Added (GVA)?

Key takeaways:

• Gross Domestic Product (GDP) is a crucial indicator of a nation’s economic scale and serves as a standard reference for comparing various metrics between countries or regions, such as tax obligations and welfare spending.
• To make GDP comparisons more meaningful, it is often expressed in “real” terms, adjusted for price fluctuations. The estimation of real GDP is based on a "base year" and involves extensive datasets on production, prices, and employment.
• This base year is revised every 5-10 years to reflect changes in prices and the structure of the economy. The National Statistical Office (NSO) is responsible for revising the GDP series, drawing on expertise across different domains.
• The current GDP series, which uses 2011-12 as the base year, is set to be updated, with 2020-21 proposed as the new base year. While most major datasets are available for this update, Census data is still missing.
• The NSO is considering using data from the Goods and Services Tax (GST) system to estimate value addition, potentially replacing the Ministry of Corporate Affairs’ MCA-21 database currently used for the private corporate sector, which contributes around 38% to GDP.

• The MCA-21 database was introduced in the last revision (2011-12 base year) to replace the Annual Survey of Industries (ASI) as the method for estimating factory manufacturing value.
• Previously, the Reserve Bank of India (RBI) used a sample of large companies to estimate output for the non-financial corporate sector, but this approach was deemed insufficient as it missed value generated outside traditional factory settings.
• The MCA-21 database, which offers comprehensive corporate data from mandatory filings, was considered a more accurate representation of corporate output.
• When the 2011-12 base year replaced the 2004-05 series, the overall GDP showed a slight reduction in absolute size but an increase in growth rate. However, there was a significant discrepancy in the manufacturing sector’s performance.
• For example, the new series indicated a 5.4% growth in manufacturing for 2013-14, whereas the earlier series showed a contraction of 1.9%.
• This divergence raised concerns, especially since the revised industrial growth rate did not align with other economic indicators like bank credit growth and capacity utilization. Further investigation pointed to potential overestimation in the MCA-21 database.
• Despite this, the official agencies defended the revised GDP estimates, arguing that the use of the larger, more detailed MCA-21 database, along with improved estimation techniques, better captured the economy.
• Critics questioned whether a larger dataset truly resulted in more accurate data, especially since the government has not made the MCA data accessible for independent review.