A massive politico-economic debate has ensued on Thursday following the Central Statistics Office (CSO) preparing back-series GDP estimates for the years 2004-05 till 2010-11 as per 'constant' 2011-12 base prices.
What is constant, current, real GDP and nominal GDP?
1. GDP estimates (and other macro indicators) that are put out each year are based on 'current' (prevailing) prices, meaning that while comparing one year's GDP with another year there's no adjustment for inflation (and other factors) between those years, making it an inaccurate comparison. Essentially, this 'nominal GDP' comprises the absolute values of goods and services produced in the country that year. In order to be able to compare and get a real idea of how the economy is growing year versus year, the figures need to be brought under a 'constant' base year. This becomes 'real GDP'. Nominal GDP is often higher than real GDP, but not always.
2. The CSO says the following:
The reason for changing the base year of the national accounts periodically is to take into account the structural changes which have been taking place in the economy and to depict a true picture of the economy through macro aggregates like Gross Domestic Product (GDP), National Income, consumption expenditure of Government and individuals, capital formation etc. For examining the performance of the economy in real terms, estimates of these macro-economic aggregates are prepared at the prices of
selected year known as base year. The estimates at the prevailing prices of the current year are termed as “at current prices”, while those prepared at base year prices are termed as “at constant prices”. The comparison of the estimates at constant prices, which means “in real terms”, over the years gives the measure of real growth.
What is the current 'base year' and when was it applied?
3. Here's a full account of when base years have been revised:
From 1948-49 to 1960-61 in August 1967
From 1960-61 to 1970-71 in January 1978
From 1970-71 to 1980-81 in February 1988
From 1980-81 to 1993-94 in February 1999
From 1993-94 to 1999-2000 in January 2006
From 1999-2000 to 2004-05 in January 2010
From 2004-05 to 2011-12 on January 30, 2015
4. The current 'base year' is 2011-12. It was introduced by the CSO on January 30, 2015, replacing the previous 2004-05 base year series.
Why was 2011-12 chosen as base year?
As per the CSO:
"Since the 1993-94 series, the CSO started using the work force estimates from the results of Quinquennial Employment and Unemployment Surveys of National Sample Survey Organisation (NSSO), which are conducted once in every five years, and consequently started revising the base years of national accounts statistics once in every five years coinciding with the years for which the NSSO conducts the Quinquennial Employment and Unemployment Surveys (EUS)."
"The NSS (National Sample Survey) 61st Round Quinquennial EUS (Employment and Unemployment Surveys) conducted in the year 2004-05, on which the previous series of national accounts was based, was followed by a quinquennial EUS in 2009-10. However, the year was not considered a “normal” year since it succeeded the global slowdown of 2008. Therefore, a fresh EUS was conducted in 2011-12. The results of this survey have been used for the compilation of the estimates in the new series with base year 2011-12, released on 30th January, 2015"
5. How has the 2011-12 base year revision changed GDP estimates?
When the revision was applied in 2015, the GDP for the year 2012-13 was revised from 4.7% to 5.5% and for 2013-14, from 5% to 6.4%.
Now, with the backdating, the GDPs for the applicable years stand as follows:
6. P Chidambaram: "Niti Aayog's revised GDP numbers are a joke. They are a bad joke. Actually they are worse than a bad joke. The numbers are the result of a hatchet job. Now that Niti Aayog has done the hatchet job, it is time to wind up the utterly worthless body. The earlier numbers were calculated by the National Statistical Commission. Has the Commission been disbanded? Former Chief Statistician Pranab Sen is absolutely correct. Niti Aayog has nothing to do with tabulation of data. I wonder if Niti Aayog Vice Chairman Rajiv Kumar will agree to a debate the data than telling journalists that their questions are "undeserving of an answer"."
7. Rajiv Kumar, Niti Aayog Vice-Chairperson who announced the revision and issued a long press briefing:
"NITI Aayog uses data extensively for making logical policy recommendations. The data is always based on assessment & quality check by eminent statisticians. Therefore, it was logical for NITI Aayog to provide the platform for its release. Pronab Sen would know that MOSPI & Yojana Bhavan worked closely together."
8. Kapil Sibal:
9. Finance Minister Arun Jaitley:
"The CSO, in the year 2015, changed the way of calculating Gross Domestic Product (GDP). GDP growth rate estimates were revised from the year 2012-13 onwards with 2011-12 being the base year. Since then, every quarter and annually, GDP data is released on that basis. The immediate impact of the revision based on the new GDP series was on the last two years of the UPA Government. For the year 2012-13 the growth rate was revised from 4.7% to 5.1% and later again to 5.5%. Similarly, for 2013-14 the GDP growth rate was revised from 5% to 6.9% and later revised to 6.4%.
WHAT DID THE UPA SAY IN 2015
Once the new GDP estimates were given, my predecessor Shri P. Chidambaram publically welcomed the new series. He said “the new data successfully establishes the fact that UPA succeeded to revive the economy. The revised GDP data will end misconceived charges that UPA mismanaged the economy” (3rd February, 2015).
THE BASIS OF NEW SERIES
The new series is more broad-based and is a better reflection of the Indian economy. It is globally more comparable. Most experts, including those who have headed the CSO, have opined that this better represents the real state of the Indian economy. Obviously, when the new series is in place, it has to be used as a basis for backward revision. So what was revised from the year 2011-12 onwards is now being revised from 2004-05. Consequently, the same basis which improved the growth estimate in the last two years of the UPA Government somewhat downgraded it in the earlier years. Those who took after the new series in 2015 now consider the new series to be a “hatched job” and a “bad joke”. What humours some when data shows an upward trend depresses them if it moves in the reverse direction.
THE CONGRESS PARTY
The Congress Party’s reaction is given by those who perhaps have a nodding acquaintance with the subject. Data based on facts and on the best global practices is rejected by the Party because it takes away the last of its surviving arguments “my GDP growth was higher than yours”.
The CSO under various Governments has always functioned objectively. It maintains an arms length distance from the Finance Ministry. North Block becomes aware of the final figures only when they are released. It is an organisation that has global credibility. No one in India has ever imputed motives to the CSO. The sooner the Congress Party realises that its policy paralysis pushed India into the Fragile 5, the better it will be for the Party and its leadership."
10. Sanjeev Sanyal (Principal Economic Adviser) Finance Ministry: "There should be no politics over this issue. Some numbers have gone up and some have come down. But it is not like we are using any other system we are going through the same system only."