India revised its GDP calculation methodology in 2015, adopting the new base year 2011-12. The updated method uses Gross Value Added (GVA) at basic prices, providing a more comprehensive and accurate representation of economic activities. This change aimed at better reflecting the evolving economic landscape and improving measurement accuracy.
UPSC Mains General Studies Paper – 3 Mains 2021
UPSC Mains Civil Services IAS Exam Question Paper – 2021
Approach
- Start with a brief introduction of the concept of GDP with the context of the new series announced.
- Explain the difference between computing methodology of GDP before and after the year 2015.
- Conclude/ way forward accordingly.
Answer
Introduction
- Gross Domestic Product, is a widely used economic indicator that measures the total value of all goods and services produced within a country’s borders over a specific period. It serves as a crucial metric for assessing the overall health and growth of an economy.In 2015, an announcement was made regarding a new series for calculating India’s GDP. The objective of this update was to enhance the methodology by incorporating new data sources and aligning it with the standards set by the United Nations (UN).
Body
The difference between computing methodology of GDP before and after the year 2015: The new methodology introduced in 2015 brought several significant changes to the calculation of India’s GDP. Here are the key differences between the old and new methodologies:
- Change in Base Year:
- Pre-2015: The base year for GDP calculation was 2004-05.
- Post-2015: The base year was updated to 2011-12.
- This change aimed to align the calculation with global practices and capture economic information more accurately.
- Data Sources for Measuring Manufacturing Sector Growth:
- Pre-2015: Manufacturing sector performance was assessed using data from the Index of Industrial Production (IIP) and the Annual Survey of Industries (ASI), covering over two lakh factories.
- Post-2015: Data from firms’ annual accounts filed with the Ministry of Corporate Affairs (MCA 21) was utilised, encompassing around five lakh companies. This shift aimed to provide a more comprehensive and detailed representation of the manufacturing sector.
- GDP Calculation Method:
- Pre-2015: GDP at factor cost was calculated.
- Post-2015: The international practice of GDP at market price was adopted. Additionally, for sector-wise estimation, Gross Value Added (GVA) at basic price was used. This change involved considering not only the cost of production but also product subsidies and taxes.
- Calculation of Labor Income:
- Pre-2015: All labour inputs were considered equal.
- Post-2015: The new methodology introduced the concept of “effective labour input” and assigned different weights based on whether an individual was an owner, a hired professional, or a helper. This change aimed to provide a more nuanced assessment of labour income.
- Value Addition in Agriculture:
- Pre-2015: Value addition in agriculture was limited to farm produce.
- Post-2015: The new methodology expanded the scope of value addition in agriculture beyond farm produce. Livestock data became a critical component of the calculation.
- Inclusion of Financial Sector Income:
- Pre-2015: Financial corporations in the private sector, excluding banking and insurance, were limited to a few mutual funds and estimates compiled by the Reserve Bank of India (RBI) for Non-Government Non-Banking Finance Companies.
- Post-2015: The coverage of the financial sector expanded to include stockbrokers, stock exchanges, asset management companies, mutual funds, pension funds, and regulatory bodies such as SEBI, PFRDA, and IRDA. This change aimed to capture the income generated by a broader range of financial institutions and activities.
Conclusion
- Hence, we can say that The new methodology is statistically more robust as it incorporates a broader range of indicators, including consumption, employment, and enterprise performance. It also takes into account factors that are more responsive to current changes, making the estimation process more accurate and dynamic.
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