Earlier this week the Central Statistics Office (CSO, a body under Ministry of Statistics and Programme Implementation of India) had released India’s Gross Domestic Product (GDP) figures with the new series. Everyone got surprised with the announcement of new estimates of the GDP. Yes, if we look at the numbers it is very surprising for many of us. Till now we were thinking that India has grown at a subdued rate of 4.7 percent in the previous financial year i.e. 2013-14 and suddenly they are saying we have grown at 6.9 percent. Last month the World Bank and the IMF had predicted that India is set to become the fastest growing major economy by 2016 and now CSO is saying we are already the fastest-growing major economy. We overtook China’s growth rate in the year 2014 itself. (Central Statistics Office, Ministry of Statistics and Programme Implementation, 2015) Isn’t it shocking or surprising?
Let’s make it simple and try to understand what this mess is all about. To understand this whole thing we will have to first understand what GDP or in other words national income really means. Let me state the simple definition of GDP which is globally used to calculate GDP.
“GDP is the market value of all final goods and services produced within a country in a given period of time.” (Mankiw, 1998)
In other words, it’s nothing but the total production of goods and services happened in a particular financial year. Now the thing which we will have to understand is the concept of market value. There are two ways in which one can calculate the GDP. One is GDP at factor cost (the cost of production) and the other one is GDP at market value. There is a simple formula to understand the difference between the factor cost and the market value.
GDP at Market Value = GDP at Factor Cost + Indirect Taxes – Subsidies (Rakesh Singh, 2014)
So, in simple terms GDP at market value means the price when you add the indirect taxes into it and deduct subsidies from it.
Till now we were using the factor cost method to calculate the GDP in India, but if you look at the global definition one can simply say it’s not the factor cost it’s the market value which should be taken into consideration for the calculation.
CSO has done exactly the same; they have started calculating GDP at market value, till now which we were calculating on the factor cost. There is one more change which they have made but it is a routine process. They have changed the base year from 2003-04 to 2011-12. The base year is nothing but the year by which we compare the data of all the other years. This has been done to avoid the effect of price rise (inflation) in our growth data. When one excludes the effect of inflation he calculates the real growth in the output and not the growth which comes just because of the price rise.
Now let’s see what will happen if we follow the new series? What has changed so drastically that we all have got shocked or surprised by this data?
In my personal view, nothing has changed in the economy and it’s just an improvement in the way we were calculating. We have made the correction in the mistake which we were doing for last many years. So there is no point debating on whether this is true or not. This is very much true that the economy is growing at more than 7 percent rate, it just that we were calculating it differently. Yes, it is a real growth but this has not happened in just a few months, we were having this growth for years but we didn’t know this.
In conclusion, I will say it is the same case like a student who kept scoring 80 percent marks but due to teacher’s error of calculation, he always got 60 percent marks. Now the teacher has realized his mistake and given the corrected result to the student which shows 80 percent marks. Nothing has changed; the student should not feel that he has become more brilliant now. It just that the student has got his real grades, he should set his next target on the basis of these real grades of 80 percent and not on the 60 percent. In other words, India should hope for the double-digit growth and not for the 8 percent growth target.
Central Statistics Office, Ministry of Statistics and Programme Implementation. (2015). Press Note on Advance Estimates of National Income 2014-15. New Delhi: Government of India.
Mankiw, N. G. (1998). Principles of Economics. New York: Cengage Publishing House.
Rakesh Singh, D. R. (2014). Manager and the Macroeconomy. Mumbai: New Book Review Publishing House.