Value Addition in the GDP revision

GS Paper III Economy

The National Statistical Office (NSO) is considering using GST (Goods and Services Tax) data to estimate value addition in the upcoming GDP revision.

GDP Base Year Revision to 2020-21

GDP

This would replace the MCA-21 database from the Ministry of Corporate Affairs, which is currently used for the Private Corporate Sector (PCS), accounting for 38% of GDP.
Current and Proposed Base Year
- The current GDP base year is 2011-12.
- A revision is planned, proposing 2020-21 as the new base year.
- Most major datasets are ready, except for Census data.

About MCA-21 Database

Background: The MCA-21 database was introduced during the last GDP revision (2011-12 base year) to improve the estimation of value addition in the Private Corporate Sector (PCS).
- Previous Methods:
  - Annual Survey of Industries (ASI): Earlier, ASI was used to estimate value added by factories.
  - RBI Sample: A small sample of large companies by the Reserve Bank of India (RBI) was used to measure non-financial corporate output.
Reason for the Shift:
- Limitations of ASI: ASI didn’t account for value added outside of factories within corporate entities.
- Inadequate RBI Sample: The RBI sample couldn’t capture the rapid growth in PCS.MCA-21 Benefits:

What is Base Year?

It is the first year in the financial index.
It provides a reference point for measuring changes in the economic trends and variables such as GDP, CPI, PPI.
In addition to the above, it helps policy decision makers by providing insightful data on inflation, employment, and economic growth.

- - The MCA-21 database is extensive.
  - It provides up-to-date data on corporate annual returns and results.
  - It offers a more accurate picture of corporate output.

Overestimation: The MCA-21 database led to overestimation of GDP growth rates, particularly in the manufacturing sector.

The 2011-12 base year led to:
- Smaller absolute GDP size but a faster growth rate.
- For 2013-14, industrial growth showed a sharp contrast: +5.4% growth in the new series versus -1.90% in the earlier series.
This discrepancy raised concerns as other economic indicators, like bank credit growth and industrial capacity utilization, didn’t align with the revised GDP figures.

- Comparison of Estimates: Gross Value Added (GVA) and Gross Fixed Capital Formation (GFCF) were compared between National Accounts Statistics (NAS) and Annual Survey of Industries (ASI) for the period 2012-13 to 2019-20.
- Findings:
  - GVA: NAS reported an average annual growth rate of 6.2%, while ASI reported 3.2%.
  - GFCF: NAS showed a growth rate of 4.5%, compared to 0.3% by ASI.
Inconsistent Data: The data from MCA-21 did not align with other macroeconomic indicators, such as bank credit growth and industrial capacity utilization.
Lack of Transparency: The government’s refusal to make the MCA-21 data available for independent scrutiny raised doubts about the accuracy of the estimates.

Unverified Data: GST data may be unverified and could contain errors or inconsistencies.
Limited Access: The lack of public access to GST data limits its potential for independent analysis and validation.
Methodological Challenges: Developing accurate estimation methods using GST data may be challenging, especially for specific industries and sectors.

GDP is a monetary measure of the total market value of all final goods and services produced within a country over a specific period.
Purpose:
Used to assess the economic health of a country or region.
Types of GDP:
- Nominal GDP
  - Measures economic output using current prices without adjusting for inflation.
  - Calculation: All goods and services are valued at their selling prices in the year they are produced.
  - Usage:
    - Useful for comparing output within the same year.
    - Expressed in local currency or U.S. dollars at current exchange rates for international comparisons.
- Real GDP
  - An inflation-adjusted measure of economic output, reflecting the actual quantity of goods and services produced.
  - Real GDP is calculated using “constant” prices, removing the effect of inflation or price changes.
  - Estimating Real GDP
    - Base year is used to estimate real GDP and is updated every 5-10 years.
    - The National Statistical Office (NSO) is responsible for revising the GDP base year to reflect changes in prices and economic output.
  - Purpose:
    - Allows for year-to-year comparisons by showing real growth or decline in production.
  - Calculation:
    - Uses a GDP price deflator to account for price changes between the current year and the base year.
    - Nominal GDP is divided by the deflator to obtain real GDP.

GDP

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