In the next few months, the Central Statistics Office (CSO) proposes to replace the gross domestic product (GDP) series of 2011-12 base year with a new set of National Accounts using 2017-18 as the base-year.

Background to the dispute

For the past four years there has been a raging controversy over the current GDP figures on account of questionable methodologies and databases used. According to official data, the annual economic growth rate has sharply decelerated to about 5% in the latest quarter, from over 8% a few years ago. The reality may, however, be far worse. Independent studies using multiple statistical methods to validate the official GDP estimates by the former Chief Economic Adviser, Arvind Subramanian, and Sebastian Morris of the Indian Institute of Management, Ahmedabad, have suggested that the annual GDP growth rates during the last few years may have been overestimated by 0.36 to 2.5 percentage points.

Why is there such distrust in the official GDP figures?

To understand the origins of the dispute, one has to go back to early 2015 when the CSO released a new series of GDP with 2011-12 as base-year, replacing the earlier series with the base-year 2004-05. Periodic rebasing of GDP series every seven to 10 years is carried out to account for the changing economic structure and relative prices. Such re-basing usually led to a marginal rise in the absolute GDP size on account of better capturing of domestic production using improved methods and new databases.

Demonetisation as shock

The suspicion of official output estimates became particularly intense after the demonetisation of high valued currency notes in November 2016. By most analyses, the economic shock severely hurt output and employment. Chief economist of the International Monetary Fund, Gita Gopinath’s academic research paper (co-authored) published by the highly regarded National Bureau of Economic Research in the U.S. in May 2019 showed an adverse effect of demonetisation on growth rate. Yet, the official GDP for the year 2016-17 grew at 8.2%, the highest in a decade.

Why there is inaccuracy in arriving at estimates?

The source of the problem, according to many economists, is the underlying methodologies for calculating GDP (in the 2011-12 series) which they claim are deeply flawed, as well as the new dataset used in estimating the private corporate sector’s contribution. Some of the recent, prominent criticisms are as follows.

In a first, the CSO estimated value addition in the private corporate sector using the statutory filing of financial results with the Ministry of Corporate Affairs. The private corporate sector accounts for about a third of GDP, and spans all production sectors, and roughly about half of the private corporate sector output originates in manufacturing. The database of the Ministry of Corporate Affairs has been criticised by many as unreliable; hence it is possible that the private corporate sector output has been overestimated.

For example, the Ministry’s database on “active” companies — that is companies claiming to have submitted audited financial results regularly for three years — seems to contain many companies that are actually inactive (not producing output on a regular basis).

Need for a review

The proposed change over to a new base-year of 2017-18, is, in principle, a welcome decision. However, considering the methodological disputes and data related questions relating to the current national accounts series, as illustrated above, what would the rebasing potentially accomplish? Doubts will persist so long as the underlying methodological apparatus remains the same; feeding it with up-to-date data is unlikely to improve its quality.

Source: The Hindu

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