Pitfalls of estimating GDP

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Context: 

The National Statistical Organization has decided that instead of the database MCA-21 of the Ministry of Corporate Affairs, the Goods and Services Tax (GST) data will be used for the estimation of value addition in the Private Corporate Sector (PCS).

Gross Domestic Product

Gross Domestic Product(GDP) has been widely accepted as the most critical indicator of a country's economic size that actually embodies the sum total of the monetary value of all goods and services produced within the territory of India during a specific time period.

It is an all-inclusive denominator used to compare other economic indicators for and between countries and regions as well as to get the tax burden, welfare spending, and overall general well-being of an economy.

Types of GDP:

Nominal GDP

Nominal GDP is the total dollar value of goods and services produced in a country over a period of time, without adjusting for inflation. It is also known as GDP at current prices or GDP in value.

Real GDP:

Real GDP is reported at constant prices, meaning that inflation adjustment has taken place and thus enables better measurement of changes occurring in the performance of an economy over time, which subsequently will allow meaningful comparison between different periods of time.

The real GDP is typically measured as dependent on a base year. 

The existing series of GDP is based on the year 2011-12, which was determined during the previous revision process.

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Previous changes in GDP estimation 

The MCA-21 database was implemented in the latest GDP revision using the 2011-12 base year, replacing the Annual Survey of Industries (ASI) and Reserve Bank of India (RBI) data previously used for estimating manufacturing value added. 

This change was necessary because the ASI inadequately captured value added outside factory settings, and the RBI sample did not effectively represent the growing Private Corporate Sector (PCS). 

The 2011-12 GDP revision resulted in significantly higher growth rates for the manufacturing sector compared to earlier estimates which raised concerns as these figures did not align with other macroeconomic indicators, such as bank credit growth and industrial capacity utilisation, leading to scepticism about the reliability of the revised GDP figures.

Issues with previous estimates 

Comparative studies between GDP estimates based on the MCA-21 database and those from the Annual Survey of Industries (ASI) have revealed significant discrepancies. 

From 2012-13 to 2019-20, the average annual growth rate of Gross Value Added (GVA) in the National Accounts Statistics (NAS) was 6.2%, whereas the ASI reported only 3.2%. 

Similarly, Gross Fixed Capital Formation (GFCF) showed a growth rate of 4.5% in NAS compared to just 0.3% in ASI. 

GFCF measures the investment in assets used for producing goods and services rather than consumption. These findings might suggest a systematic overestimation in the NAS series.

Proposed changes for GDP revision 

Base Year Revisions: 

The National Statistics Office (NSO) has proposed to change the base year to 2020-21. It would introduce a revised series reflecting more current economic conditions.

A revision every 5 to 10 years ensures it reflects the present times of economics. Therefore, a revision comes as an essential prime need for accurate estimation in economics.

Transition from MCA-21 to GST

Since the NSO is trying to make estimates of Gross Domestic Product (GDP) more accurate, it has decided that instead of database MCA-21 of the Ministry of Corporate Affairs, they will now be using goods and services tax (GST) data for the estimation of value addition in Private Corporate Sector (PCS).

The issue in the shift towards GST-based data

The use of GST data for GDP estimation raises the concern that the GST dataset may not have been sufficiently analysed or validated for policy research.

Way ahead

Recommendations to use GST data for GDP estimation should be implemented with caution. The data needs to be tested and validated stringently by NSO so that it may bear economic evaluation.

A bigger set does not necessarily mean better data integrity. For this reason, there is a need for proper vetting and validation processes in GDP estimation. 

To ascertain whether GST data may prove suitable for value addition estimation, the NSO should start pilot studies by critically estimating its performance across various industries, sectors, or regions.

Sources:

https://www.thehindu.com/business/Economy/on-the-pitfalls-of-estimating-gdp/article68671742.ece#:~:text=Without%20systematic%20analyses%20and%20cross,will%20be%20hard%20to%20establish.