Executives are discussing India a lot more than they used to these days. With China’s potential slowdown and India’s new growth numbers, it’s clear that the latter will become the fastest growing emerging economy in the next few years, gaining a larger share in multinationals’ emerging markets portfolios.
GDP growth over the next five years will remain consumption driven, with investment increasing only gradually. The center is expected to carry out small, sector-specific reforms, leaving the critical measures, like easing land acquisition, to the states.
Despite this, an annual growth rate of 7.75 percent is quite a feat, so it’s important to take a deeper dive into the numbers. India’s Central Statistics Office (CSO) recently changed its GDP series. The new series was the subject of many discussions among economists, statisticians and government officials. India’s growth rate had seen a sudden rise, putting it at numbers comparable to China, but things on the ground did not “match” a 7.3 percent growth rate.
The revision was twofold. First, the CSO changed the base year from 2004-2005 to 2011-2012. Base year changes are commonplace, and countries frequently undergo a rebasing to reflect structural changes in the economy. India rebases its GDP about once every five years.
The second change was more interesting; the CSO revised the method of GDP calculation. Notable modifications included adopting the recommendations of the System of National Accounts 2008 (SNA 2008) to bring figures in line with international standards. New data from the population census of 2011 and the National Sample Survey (NSS) sixty-eighth round on employment, unemployment and consumer expenditure (2011-12) was also included, among other surveys.
As in the old series, due to lack of annual surveys, output in the unorganized,or informal, manufacturing and services sectors is calculated using the Labor Input (LI) method, which uses a benchmark-indicator process and then calculates output as the estimated labor input times the value added per worker. In the new series, an Effective Labor Input (ELI) method is used. This method distinguishes workers on productivity by assigning weights to different categories of workers, changing overall output contributed by these sectors.
The CSO also improved its coverage of the corporate sector, using data from the Ministry of Corporate Affairs’ new initiative, MCA21, and increased coverage of the financial sector. Another notable change includes the classification of activities according to the National Industrial Classification (NIC) 2008. Most importantly, calculation of output has shifted to Gross Value Added (GVA) at basic prices from GVA at factor costs in the old series, and GDP is calculated at market prices by adding product taxes and reducing subsidies from GVA at basic prices.
Despite clarifying that the two series are not comparable, the CSO has come under criticism for not updating historical numbers with the new methodology. Additionally, a sharp rise in GDP in 2013 and 2014 has raised doubts over accuracy, especially since 2013 was a tough year for the Indian economy.
It can be hard to distinguish which method is more appropriate, but the ease of international comparison has tilted the scales in favor of the new series, at least temporarily.
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