Explained: Backstory of GDP back series and the controversy surrounding it

Why has a report suggesting that the Indian economy grew faster under the UPA than during the last four years, triggered a controversy? What goes into making statistical estimates such as these?

Written by Aanchal Magazine , Sunny Verma | New Delhi | Updated: August 22, 2018 8:30:57 am
GDP, National Statistical Commission, GDP growth during UPA regime, Committee on Real Sector Statistics, NDA government, Indian economy, NSC Committee report GDP report, Ministry of Statistics and Programme Implementation With the move to the new base year, the growth rate of the economy for 2013-14 was estimated at 6.9%; it was 4.7% on the 2004-05 base. Similarly, the growth rate for 2012-13 was revised upwards to 5.1% from 4.5%. (Illustration: CR Sasikumar)

In January 2015, the government moved to a new base year of 2011-12 from the earlier base year of 2004-05 for national accounts. The base year of national accounts had been revised earlier in January 2010. In the new series, the Central Statistics Office (CSO) did away with Gross Domestic Product (GDP) at factor cost, and adopted the international practice of valuing industry-wise estimates as gross value added (GVA) at basic prices. With the move to the new base year, the growth rate of the economy for 2013-14 was estimated at 6.9%; it was 4.7% on the 2004-05 base. Similarly, the growth rate for 2012-13 was revised upwards to 5.1% from 4.5%.

Growth of the manufacturing sector also became higher in the new series. Apart from using establishment-based datasets of the Index of Industrial Production (IIP) and Annual Survey of Industries (ASI), the CSO started to use the enterprise-level corporate database of MCA-21 — an e-governance initiative of the Ministry of Company Affairs that was launched in 2006 to allow firms to electronically file their financial results — and advance filing of corporate accounts, to calculate national accounts.

OPINION | GDP Report – misreading the facts

For years preceding 2011-12, however, the CSO faced issues for evaluating GDP with the new base year — due to the lack of availability of the MCA-21 database. In 2017, then Chief Statistician of India T C A Anant said that the back series was proving to be a “major statistical challenge” in the absence of data for earlier years, and declared “it’s not going to happen that quickly”.

NSC Committee report

According to a report prepared by a Committee on Real Sector Statistics appointed by the National Statistical Commission (NSC), the autonomous body that helps in collection of data by India’s statistical agencies, the economy grew at a faster pace under the UPA government from 2004-05 to 2013-14, compared with the average growth during the first four years of the current government.

The average GDP at factor cost was 8.87% during UPA-I (2004-05 to 2008-09), and 7.39% during UPA-II (2009-10 to 2013-14), the Committee said. In contrast, average growth rate in the first four years of the NDA government (2014-15 to 2017-18) was calculated at 7.35%. In 2006-07, growth reached 10.08%, then fell to 7.16% in 2008-09, as the global financial crisis affected financial markets and economies. In 2012-13 and 2013-14 — the last two years of the UPA government — growth rate fell to 5.42% and 6.05% respectively.

READ | As per new GDP measure, UPA decade growth revised up to 8.12%, hit 10% in 2006-07: NDA panel

The Committee noted that the difference between the rates of economic growth in the old series (2004-05 base) and the new back series (2011-12 base) was minimal. It has presented its estimates to the NSC for consideration. As per the new methodology followed by the CSO, GDP is calculated by adding product taxes to the GVA at basic prices, and removing subsidies.

The data also show the GDP and GVA series to be broadly in tandem. GDP, which incorporates indirect tax collections net of subsidies, should normally be higher than GVA. But if net indirect tax collections grow slower than subsidies, GVA could be higher than GDP. In its latest research report, the State Bank of India says the new series shows that on at least 12 occasions out of 18 until 2011-12, GDP lagged GVA, possibly because fertiliser subsidy was scaled up significantly from 2005-06 following poor agricultural growth. Also, in FY09, GDP was higher then GVA by a massive 301 basis points on the back of huge a fiscal stimulus. (Subsidies grew by a massive 83%.) “The fiscal stimulus did push up the growth rate to 10.8% in FY11 from 4.2% in FY09 but it did not sustain for long with a jump in inflation,” SBI said.

Methods of estimation

Back series can be generated in three ways, the Committee on Real Sector Statistics said — one, based on the new GDP methodology by using the base data wherever available; two, based on a production shift approach; and three, by projecting the old series using the base year 2004-05 forward, and then adjusting it to the 2011-12 base by comparing with the new series. The third approach is yet to be tried, the Committee said.

As per the revised methodology approach, the CSO prepared tentative estimates of growth rates of GVA and GDP from 2004-05 to 2011-12 at current and constant prices. Estimates of GVA were compiled separately for different institutional sectors. Public corporations and the general government sector were “backcasted” (a method of planning that defines a future, and then works backwards to identify policies to connect that defined future to the present) by “splicing” (which is a way to combine multiple index numbers with different bases into a single series).

Because reliable Ministry of Company Affairs datasets were not available, the private corporate sector was backcasted using data from the Centre for Monitoring Indian Economy, a leading business information company. The unincorporated sector was backcasted by indicators used in the new series. MCA-21 data, available 2006-07 onward, were used to estimate the corporate segments of the economy in the new series. Findings based on this method need to be deliberated upon by the Advisory Committee on National Accounts Statistics, and were not a part of the NSC Committee’s report.

The Committee used the production shift method to convert the old GDP series consistent with the new series, wherein a quantum correction factor was used instead of the usual splicing method. Simply put, the difference in output at 2011-12 between two series occurred due to an upward or downward shift in the production curve, that included new economic activities and/or excluded older activities that became extinct. To get the new back series on the base year 2011-12, it was assumed that this shift in production did not occur in a single year — and the difference in output was then redistributed asymptotically backward with an annual declining rate up to the year 1993-94.

Prof N R Bhanumurthy of the National Institute of Public Finance and Policy, who was a member of the panel set up by the NSC, said that since the new GDP revision represents value addition in goods, it eliminates redundant goods. So, for instance, since computers replaced typewriters, the latter are taken out of back series calculations in this approach.

Government’s response

As the Congress used the report to underline higher economic growth under Prime Minister Manmohan Singh, the government clarified Sunday that the Committee’s estimates on back series data were not official — but were meant only to facilitate a decision on the “appropriate approach” for calculating back series data. The NSC, too, clarified that various alternatives were being discussed to finalise the GDP back series data, and the calculations were still a “work in progress”. The recommendations will be examined by the Ministry of Statistics and Programme Implementation (MOSPI) and other experts, the government said. The Committee itself added a disclaimer saying “These Reports are not final and the figures/estimates are also not final and should not be quoted anywhere. The Reports have not been approved by National Statistical Commission or MOSPI.”

Issues with other datasets

Since the release of the new series, there has been continuous flip-flop over the release of the back series of GDP. Other statistical tools to gauge economic development have also undergone changes over the past four years, including a revised IIP and inflation indices, and interventions such as payroll reporting based on EPFO data. But in the process, regular datasets such as the Annual Employment-Unemployment Survey have gone missing. Six rounds of the Survey, conducted by the Labour Bureau under the Ministry of Labour & Employment, have been done, but only five have been released — the last one in September 2016, for the period 2015-16.

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