If you’re a student of economics or just someone who reads the newspaper (please wipe that awestruck look from your face, some of us still prefer good, old-fashioned newsprint to tablet screens) you would know what GDP means. For the uninitiated, GDP, or Gross Domestic Product is one of the primary and most widely used indicators to gauge the health of a country's economy. It represents the total dollar value of all goods and services, ranging from your Nano that was manufactured at Tata’s Sanand plant, to that call-centre employee’s job, produced over a specific time period or the current financial year. You can also think of it as the size of the economy.
So, if you’ve cared to notice, suddenly the Indian economy seems to be in much better shape than before. Should we attribute this overnight improvement to ‘Modi’s Magical Powers of Modification’? We’d say, yes, partly. But hold on. It wasn’t some grand reform agenda that brought about this change but a little sleight of hand on a calculator.
The Government’s statistics wing has made two changes to the GDP calculation that has lifted India’s GDP growth figure to 6.9 per cent for 2013-14 instead of the 4.7 per cent estimated earlier. The change in the base-year calculation will ensure that the products and services included in the GDP calculation reflect the present state of the economy and are inflation-adjusted.
For instance, the latest change in base year from 2004-05 to 2011-12 now includes the recycling industry, which didn’t figure in the earlier GDP computations. Isn’t that great! Normally, such industries fell off the radar, and weren’t included. Their inclusion and the profits they make will now boost the value of the economy and provide a more accurate picture.
Likewise, trading activities of manufacturing firms are now included in that sector’s share. This change, along with better data compilation (online data filed with the Ministry of Corporate Affairs) has led to manufacturing increasing its share in GDP.
There have basically been two changes made to the calculation. The first was a change in the base year for the calculation. This is done routinely every five years or so. The other was to adopt a new method to measure output.
Thus, henceforth, GDP will be measured using gross value added (GVA) at market price, rather than factor cost. You take all final finished goods and services produced domestically in volume terms and multiply this by their market prices to arrive at the value of output. Intermediate goods, used by a business in the production of goods or services, need to be excluded to avoid double-counting. Apart from this, now, what the Government earns by way of indirect taxes such as sales tax and excise duty, after deducting subsidy, will also be added to calculate the GDP.
All this will result in global investors viewing India in a more favourable light. Investment allocation by such investors takes place based on GDP figures, so a promising, high GDP shows that the economy is booming and ripe for business.
While you may be suspicious, especially owing to the timing of this revision, take heart. These changes are now more in line with global practices and will, therefore, actually benefit us.