November 13th Editorial

13th November 2019

TOPIC: Indian Economy. (Paper III)

Discuss the problem with re-basing GDP estimates.

Introduction

In the next few months, the Central Statistic 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 

• Normally, rebasing is a routine administrative decision of any national statistics office.
• But these are not normal times in India for users and producers of the national accounts.
• 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.

Demonitisation as shock:

• The suspicion of official output estimates became particularly intense after the Demonitisation of high valued currency notes in November 2016.
• By most analyses, the economic shock severely hurt output and employment.
• Fixed investment to GDP ratio in the private corporate sector fell sharply from 7.5% in 2015-16 to 2.8% in 2016-17 (suspected to be on account of demonitisation).
• However, surprisingly, the ratio in the national accounts went up from 11.7% in 2015-16 to 12% in 2016-17.

The root of the problem:

• 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.
• The database of the Ministry of Corporate Affairs has been criticized by many as unreliable; hence it is possible that the private corporate sector output has been overestimated.
• For estimating GDP of the private corporate sector, questionable methods are also used for bowling up unverified “sample” estimates for the unknown and varying universe of “working” or active companies.  

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.

Conclusion:

If a new rebased series is introduced without any changes it will only entrench the existing methodological problems, and ensure that the debate will continue for the next half decade.