Knowledge Nugget: New series of GDP estimates with base year 2022-23 released. What you need to know for UPSC exam

Key takeaways:

1. The GDP is the central metric to assess the annual economic growth or the overall size of an economy and the so-called “base year” refers to the year that works as a starting point for calculations. The base year for GDP calculation is now 2022-23. In other words, the GDP in 2022-23 is used as a “base” over which the Gross Domestic Product (GDP) growth of any following year is calculated. This is the eighth such revision.

2. Double-deflation method for GVA: The 2022-23 GDP series has also undergone major changes, the most crucial of which has been how nominal GDP is adjusted for price changes to arrive at real GDP. The so-called single-deflator method, used until now by MoSPI to calculate the Gross Value Added (GVA) of all sectors other than agriculture and mining and quarrying, could lead to growth being overstated at times when commodity prices were falling or not rising as fast as consumer prices.

In a major move, the new GDP series does not use the single-deflator method at all and instead uses double-deflation, adjusting input and outputs by their respective inflation rates – with deflators also being used at a more granular level. This allows for more accurate measurement of real GDP growth.

3. New sources of data and surveys incorporated: It has incorporated data from GST, e-Vahan, Annual Survey of Unincorporated Sector Enterprise, Periodic Labour Force Survey, among others. Further, by integrating national accounts data with Supply and Use Tables, MoSPI is hoping to minimise the ‘discrepancy’ component which arises when GDP measured by the more reliable production approach does not match the GDP calculated via the expenditure method.

4. The first set of estimates of national income (GDP) for India was compiled by the “National Income Committee”, under the chairmanship of PC Mahalanobis in 1949. The first and final reports of national income by this committee were brought out in 1951 and 1954 respectively.

5. Since then, as more and better quality data became available, the Central Statistics Office (CSO) undertook comprehensive reviews of the methodology used for calculating GDP. Apart from shifting base years of national accounts series, the CSO also tried making improvements in the compilation of national accounts series, in terms of coverage of activities, incorporation of latest datasets and latest international guidelines.

6. In order to revise the base year, the MoSPI constituted an Advisory Committee on National Account Statistics (ACNAS) under the chairmanship of professor B.N. Goldar with the task to advise the Ministry on inclusion of new data sources and improvement in methodology for compilation and presentation of National Accounts Statistics for purposes of economic analysis and policy formulation.

7. Last week, the Ministry released the report of the Sub-Committee on Methodological Improvements which focuses on methodological changes in compilation of various estimates of national accounts including GDP.

Source: MoSPI

8. Following the recommendation of ACNAS, FY 2022–23 has been identified as the base year for the upcoming series. The rationale for selecting the year 2022-23 as the new base is because it is the most recent “normal” year after the disruptions of 2019-2021. The years 2019-20 and 2020-21 were significantly affected by the COVID-19 pandemic, which temporarily altered consumption patterns and industrial output.

9. It also recommended adopting the internationally recommended Denton-proportional Benchmarking Method in place of the pro-rata method used in the 2011-12 series. It is being used to eliminate artificial discontinuities in the  Quarterly National Accounts (QNA) series as well as to preserve the movement of the indicators. This also aligns QNA estimates with the annual national accounts (ANA) estimates.

10. According to the MoSPI, “Benchmarking method in the national accounts is used to derive quarterly series through combining the high-frequency information with the corresponding set of low-frequency information (based on annual variables) restricted by the Annual benchmark. Benchmarking technique tends to improve the quality of QNA series by making them consistent with ANA benchmarks and coherent with the short-term evolution of quarterly economic indicators.”

Rationale for revising the GDP base year

1. The rationale for revising the GDP base year is to accurately understand and report the state of the economy. They provide a more accurate picture of the “real” economic growth, which is the economic growth after removing the effect of inflation. An accurate reporting, in turn, is an essential requirement both for policymakers as well as all the other economic agents (from large business firms to budding entrepreneurs).

2. India started off as a predominantly agrarian economy. That meant most of the people were involved in agriculture or related activities and most of the GDP came from those activities. With each passing decade, India’s economic structure has changed.

3. Today, most of the GDP (around 55%) comes from the so-called “services” sector while agriculture etc. contribute less than 20%. However, the number of people involved in agriculture has not fallen in the commensurate manner. Estimating GDP from the farm and estimating from the services sector requires different data sets and different methodologies.

4. Further, these methodologies also change with the improvements in data as well as understanding of the linkages in the economy. For instance, it is noteworthy that up until 1999, India saw the GDP series being revised once in a decade, changing the base to a year that ended with 1.

5. The informal (or unorganised) sector playing a major role in the Indian economy and the workforce estimates for the unorganised sector were obtained from the Population Census conducted decennially in the years ending with 1. As such, it was natural to make such years the base years for each revision.

6. However, since the 1993-94 series, the CSO started using the work force estimates from the results of Employment and Unemployment Surveys of National Sample Survey Organisation (NSSO), which are conducted once in every five years.

7. As a result, since 1999, the base year has been changed every five years (until 2015). This practice was also in line with the recommendation of the National Statistical Commission that all economic indices should be “rebased” at least once in every five years.

BEYOND THE NUGGET: Three approaches to measuring GDP

1. GDP is the sum of the market value of all the final goods and services produced within the geographical boundaries of a country each year. The value of GDP measured in current prices is called Nominal GDP but it might not be a good measure of production because the increase in value may result from an increase in prices and not output.

2. Economists rely on three approaches to accurately measure GDP: Expenditure, Income, and Product. GDP calculated from all these approaches should give the same value. However, GDP measurement also depends on the structure of the economy.

3. Expenditure approach: It is a sum of four key components – personal consumption expenditure (C), investment expenditure (I), government expenditure (G), and net exports (X-M) by the rest of the world sector (ROW).

4. Income approach: It is simply calculated as income earned from all sources and includes wages and salaries, proprietors’ income (earnings from self-employment and unincorporated businesses), rental income, corporate profits, and net interest earned (interest earned minus interest paid). Additionally, the concept of GDP also includes net indirect taxes, statistical discrepancy, depreciation, and net payments made to the ROW.

5. Product approach: Also known as the output method or value-added method, it adds up the market value of all goods and services produced, excluding the goods used in the intermediate stages of production

Post Read Question

Consider the following statements:

1. The new base year for the GDP series is 2023-24.

2. The GDP series is released by the RBI.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

(Sources: Why govts revise GDP base year and methodology, why the proposed 2026 revision matters for India’s global standing, ExplainSpeaking: In defence of GDP as a measure of economic growth, Redrawing the economic map: Why India’s 2026 GDP reset is a fiscal game-changer, Three approaches to measuring GDP and why they matter)

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