A Peek at India’s New GDP Numbers

Discussion in 'Economy & Infrastructure' started by Srinivas_K, Apr 23, 2015.

  1. Srinivas_K

    Srinivas_K Senior Member Senior Member

    Joined:
    Jun 17, 2009
    Messages:
    4,674
    Likes Received:
    3,351
    A Peek at India’s New GDP Numbers

    Still confused about those sizzling new economic-growth figures coming out of India? You’re not alone.

    The country’s Central Statistical Office invited analysts and economists to a daylong workshop in New Delhi this week, hoping to explain and clarify the recent revisions to its methodology for estimating gross domestic product.

    Those revisions suddenly caused India’s projected growth rate to shoot past China’s, which in turn thrust the nuts and bolts of India’s GDP calculation into the spotlight. Officials were pelted with questions as they walked through the new data sources, the updated surveys, the tweaked methods of extrapolating and scaling and counting.

    Much of the information about the new GDP method had already been made public in a 144-page document released last month. But who has the time? Here are some highlights.

    1. In India, all cars used to be equal In earlier Indian GDP data, the key manufacturing indicator was the monthly index of industrial production, which is based on the total quantity of output in a sample of a few thousand factories.

    “The problem is that Marutis and Audis are all put together as the same,” said Ashish Kumar, director-general of the Central Statistical Office. In other words, by gauging only the volume of production, the old series was overlooking changes in monetary value brought about by product improvement and differentiation.

    In the old GDP series, a yearly survey of industrial firms supplemented the production index when it became available. But that survey, too, has a limitation: Because it measures activity at the factory level, it doesn’t account for the marketing, development, logistics and financial-planning activities that take place at manufacturing firms’ head offices.

    “In the earlier series, we were not capturing this,” Mr. Kumar said. “Because we never had access to any such information.”

    The new GDP series therefore incorporates a new database of company balance sheets from the Ministry of Corporate Affairs. For the year ended March 2012, the database includes information from more than 500,000 firms. A central-bank study that had been used previously to gauge corporate activity covered fewer than 2,500 companies.

    The impact on final growth rates is huge—and still slightly hard to swallow. In the 12 months that ended March 2013, manufacturing expanded 6.2% in the new GDP series, compared with 1.1% in the old. And in the following year, for which the old series had shown a 0.7% contraction, the new series has manufacturing growing by 5.3%.

    2. All workers used to be equal, too Well, at least for gauging activity in the informal economy. Small, unregistered companies—a major chunk of the Indian economy—typically employ unpaid helpers in addition to owners and hired workers. But before, these firms’ output was being estimated by taking the total number of workers and multiplying by per-capita added value.

    No longer. The new GDP series uses an “effective labor input” method, which assigns different weights to different kinds of workers based on their productivity. The chart is here:

    [​IMG]
    Central Statistical Office
    3. Agriculture isn’t just about crops, and livestock isn’t just about meat Two major changes in the agricultural component of the new GDP series have to do with livestock. The first is a new way of valuing “meat byproducts.” State governments had been failing to provide direct data on the values and quantities of animals’ heads, legs, fat and skin on a “systematic and regular basis.” So, thanks to a study by the National Research Center on Meat, in Hyderabad, these are now being recorded simply as a share of the total value of the animals’ flesh.

    Here’s the chart:
    [​IMG]
    Central Statistical Office
    Yum. “EOG” stands for “edible offals and glands.”

    The second major change to livestock measurement has to do with a different kind of byproduct. “For the first time, we have included the evacuation rate of goats and sheep in the production of organic manure,” said Sunil Jain, a deputy director-general at the statistics office.

    Translation: Using a study on how much those animals defecate, statisticians have added that particular kind of biological output to their economic value.

    The estimated “evacuation rates” are 0.3 kilograms per day for goats and 0.8 kilograms per day for sheep. The study, titled “Positive Environmental Externalities of Livestock in Mixed Farming Systems of India,” was conducted jointly by the Central Institute for Research on Goats, in Makhdoom, Uttar Pradesh, and the National Center for Agricultural Economics and Policy Research in New Delhi.

    With all those “droplets” added in, the value of India’s livestock sector in the new GDP series is 9.1 billion rupees, or $150 million, higher than it was in the old series.

    Why did the Central Statistical Office choose to start counting droplets? “It is based upon the observation of the farmers that, ‘OK, if I have to increase the fertility of my soil, I would request a shepherd to leave many animals in my field for a week,’ ” Mr. Jain said.

    4. Finance is still a pretty new industry in India. Or at least measuring the financial industry is pretty new

    In the previous GDP series, the industry had two main components: banking, which made up 80.1% of added value in the sector, and insurance, which made up the rest. In fact, in the official guide to the old GDP figures, the financial industry was called just that: “Banking and Insurance.”

    By contrast, the new GDP series includes separate measurements of stock exchanges and stock brokers. It counts the growing plethora of private investment funds available to Indians. In the old GDP figures, UTI, the formerly government-managed investment vehicle, had been the sole mutual or money-market fund being measured. The Employees’ Provident Fund Organization, the state-run social-security program, was the only pension fund.

    Not even informal finance, hardly a recent scourge in poorer corners of India, was being estimated separately before the latest GDP series. It was just assumed to be one-third the size of the formal, non-bank financial industry. Now, private moneylenders’ contribution to the economy is measured using survey data from the central bank.

    5. Hoarding gold is now officially virtuous In the new GDP series, households’ expenditure on gold and silver ornaments is treated as part of their savings instead of their consumption. The value of such savings, in the year ended March 2012, was recorded at 340 billion rupees, or $5.4 billion—which, despite Indians’ infamous appetite for gold, represented only 1% of total savings in the economy that year.

    6. When it comes to timely economic data, India is still far, far behind rich countries. The biggest obstacle to measuring the Indian economy is how much of it is informal: cash-based, outside the tax net and leaving no paper trail. Two-thirds of India’s nonfarm workforce are employed this way.

    With measurements on such a large portion of the economy available only via surveys conducted once every five years—less often in some cases—Indian statisticians invariably rely on various workarounds to produce yearly GDP numbers. For the informal economy, the new series uses tax and corporate data instead of blunter indexes of production to project survey findings forward.

    That’s ostensibly an improvement. But India’s data deficiencies don’t end there.

    In rich countries, GDP can be triangulated: Whether you tally up the value of what’s produced, the money that is spent to buy that production or the income earned from selling it, the total should be the same. Not so in India, where only production data are considered reliable.

    Data on securities and other financial instruments are underdeveloped as well. India doesn’t have regular statistics on employment.

    “There’s a large number of areas where we have deviated” from the United Nations’ latest guidebook on measuring GDP, said T.C.A. Anant, who holds the title of chief statistician of India—“for a large measure, because we are simply, at the moment, unable to implement those recommendations.”

    A Peek at India’s New GDP Numbers - India Real Time - WSJ
     
    Lions Of Punjab, WMD, Rashna and 7 others like this.
  2.  
  3. sob

    sob Moderator Moderator

    Joined:
    May 4, 2009
    Messages:
    6,359
    Likes Received:
    3,661
    Location:
    New Delhi
    Thanks for sharing this wonderful piece with us.

    RBI governor still has some misgivings on the new numbers. Will wait for a contrarian view on the new numbers.
     
    Srinivas_K likes this.
  4. Srinivas_K

    Srinivas_K Senior Member Senior Member

    Joined:
    Jun 17, 2009
    Messages:
    4,674
    Likes Received:
    3,351
    Demystifying India's new GDP

    The new methodology marks a shift to a value-added approach from volume based accounting.

    [​IMG]

    The recent change in the methodology to calculate the country’s gross domestic product (GDP) which catapulted India from a decadal low growth rate to become the world's fastest growing major economy left many puzzled. Indeed, with no major underlying changes in the real side of the economy, many felt it was a statistical jugglery.

    To be sure, there are still various lacunae in the way the economic growth is measured in India but a peek into some of the aspects which explain the jump in output reveals that at least part of it is due to better representation of economic activity in the country. The government's statistical body CSO released a document last week explaining the new GDP calculations. Here's what it says and what it misses out.

    So what's different in the new GDP?

    One key aspect is the change in base year. Future growth is measured by how the index moves beyond the base year. This needs to be revised periodically to keep national statistics in sync with critical sectors of the economy while weaning out those which have become obsolete or irrelevant in the larger picture.

    Besides the shift in base year to 2011-12 from 2004-05, the new series incorporates coverage of activities and of larger dataset and latest international guidelines. This is by far the more important shift.

    Nano and Audi won't be the same!

    The new series will report the value added in the economy, moving away from volume-based calculations. In the earlier series, two products falling under a common commodity basket even with different values were equated the same. Hence a Tata Nano, arguably the cheapest brand of cars in the country, and four wheelers sold by luxury automaker Audi were considered as homogeneous commodity. The new series incorporates the higher value added in Audi production.

    Look Ma I am also in

    Another and easily the biggest change that the new series takes into account is the larger data set—that is, the MCA21 database. MCA21 is the e-governance initiative of the Ministry of Corporate Affairs for filing financial numbers of private corporate sector. While the old series covered just 2,500 companies accounting for their financial results as reported in the RBI study on company finances, the new series based on MCA21 includes 5 lakh companies which constitute 74 per cent of non-financial sector in the country.

    This means a massive chunk of Indian corporate sector was not being included in the previous GDP data.

    Another change that comes from the MCA21 database is moving away from the establishment approach towards an enterprise approach. The latter accounts for different establishments or entities which come under a single enterprise.

    Finance gets a revision

    While revised GDP figures primarily focus on the non-financial sector and value added from the unorganised sector, the numbers also account for certain changes in the financial sector and particularly the savings side of the economy.

    The revised methodology categorises the entire operation of the RBI as non-market, unlike the previous series where non-market operations were included as part of the general government while the market operation was included in the category of banking and finance.

    The new series takes into account the growing financial sector, thereby including NBFCs, cooperative societies and unorganised financial sector. With Indian economy expanding and the government looking at deepening the financial markets beyond banking sector and opening up new channels of credit, the importance of the sector would grow and the new GDP is set to account for such changes.

    On the savings side, the new series categorises gold and silver ornaments purchased by households as savings and include them as part of valuables. It has also changed the treatment of savings of non-government and non-financial companies by extracting data for such entities from MCA21 database.

    What's missing and what still doesn't add up?

    While the new series incorporates much of the changes that were required for a fast growing economy, it still leaves some loopholes and some of the figures would need a major revision in the coming years.

    The biggest setback with a new series is the non-availability of past economic data to present a better growth rate picture. The series relies heavily on surveys which are conducted once or twice in a decade and are not so accurate as far as the health of the economy is concerned. Also most sectors in the country are informal, a problem which the revised methodology doesn't address.

    This is one reason why the jump in GDP growth numbers do not as much represent the actual rise in economic activity as much as correction in old absolute output data. The real change in growth rate would be captured from the current fiscal.

    The report acknowledges as much. It highlights that in the absence of back dated time series, any meaningful analysis of past trends, economic cycles, potential output remains challenging. It is also difficult to estimate at what point of business cycle we are currently operating.

    The series also suffers from data lags as MCA21 data are available on an annual basis—that too with a six-nine month lag currently. This is because private firms are not asked to submit data on a quarterly basis. The quarterly estimates for GDP will have to be revised from a volume-based approach to value-added approach. It would need to be imputed.

    The heavy reliance on sales and service taxes filings for computation of growth for some sectors would need to undergo a revision as the government moves towards GST next year.

    The high frequency macroeconomic data needs to be revised by the government as reliability of GDP data would be based on these indicators.

    Another factor is that while the new series takes into account new consumer inflation, it doesn't use it as a GDP deflator for which it is still reliant on the archaic wholesale price index.

    This creates a mismatch for policymakers and analysts alike. RBI had shifted to using consumer prices as a key parameter in deciding monetary policy drift.

    The government will release the GDP figures for Jan-March quarter of 2015 on May 29.

    (Edited by Joby Puthuparampil Johnson)

    Demystifying India's new GDP | VCCircle
     
    Khagesh likes this.
  5. ezsasa

    ezsasa Senior Member Senior Member

    Joined:
    Jul 12, 2014
    Messages:
    3,503
    Likes Received:
    3,034
    Location:
    Hyderabad, Andhra Pradesh, India
    Good Piece, was waiting for it.
    I was under the assumption the clarification white paper was yet to be released. It was stupid of me to assume that atleast some MSM News channel will include the clarifications as part of their news stories.
     
  6. sob

    sob Moderator Moderator

    Joined:
    May 4, 2009
    Messages:
    6,359
    Likes Received:
    3,661
    Location:
    New Delhi
    That would be too much. Earlier PC was criticising the new methodology but when he saw that under his tenure as FM, the GDP numbers went up he immediately started supporting it.
     

Share This Page