Pitfalls of Estimating GDP

What’s in today’s article?

• Introduction
• Proposed Changes in GDP Estimation
• Previous Changes in GDP Estimation
• Systematic Overestimation of GDP
• Concerns About Using GST Data for GDP Estimation
• Recommendations & Way Forward
• Conclusion

Introduction

• Gross Domestic Product (GDP) is a critical measure of a country’s economic size and is used universally to compare economic indicators, tax burdens, and welfare expenditures across countries.
• GDP estimates are most meaningful at constant prices, reflecting real growth by removing the effects of inflation.
• The current GDP series, with the base year of 2011-12, is due for revision, with 2020-21 proposed as the new base year.
• This revision involves the use of various datasets to accurately capture changes in the economy.

Proposed Changes in GDP Estimation

• The National Statistical Office (NSO) is considering using Goods and Services Tax (GST) data to estimate value addition for the next GDP revision.
• This data is proposed to replace the Ministry of Corporate Affairs’ MCA-21 database, which is currently used for estimating the Private Corporate Sector (PCS), accounting for about 38% of GDP.
• This shift is intended to enhance the accuracy of GDP estimates.

Previous Changes in GDP Estimation

• The MCA-21 database was introduced in the last revision of the GDP series (2011-12 base year), replacing the Annual Survey of Industries (ASI) and RBI data samples that were previously used to estimate manufacturing value-added.
• The change was made because ASI data was found to miss value addition occurring outside factory premises, and the RBI sample did not fully capture the growing PCS.
• The 2011-12 GDP revision led to surprising results, such as a significantly higher growth rate for the manufacturing sector compared to the earlier series.
• This raised concerns, as the higher growth rates did not align with other macroeconomic indicators like bank credit growth and industrial capacity utilization, leading to skepticism about the new GDP estimates.

Systematic Overestimation of GDP

• Comparative studies between the GDP estimates based on the MCA-21 database and ASI data have shown significant discrepancies.
• From 2012-13 to 2019-20, the average annual growth rate of Gross Value Added (GVA) in the National Accounts Statistics (NAS) was 6.2%, compared to just 3.2% as per ASI data.
• Similarly, Gross Fixed Capital Formation (GFCF) growth was 4.5% in NAS but only 0.3% in ASI.
  • Gross fixed capital formation is a measure of how much of an economy's new value is invested in assets that are used to produce goods and services, rather than consumed.
• These findings indicate a systematic overestimation in the NAS series, validating concerns about the reliability of GDP estimates based on the MCA-21 database.

Concerns About Using GST Data for GDP Estimation

• The proposed use of GST data for GDP estimation is seen as a potential game-changer due to its vast and up-to-date nature.
• However, concerns remain as the GST dataset has not been sufficiently analyzed or validated for policy research.
• The NSO is urged to conduct pilot studies and systematic analyses to ensure the data’s suitability for GDP estimation.
• Without these validations, the reliability of GDP estimates using GST data could remain questionable.

Recommendations & Way Forward

• To maintain the integrity of GDP estimates, the NSO should avoid hastily implementing unverified datasets and methods.
• It is crucial to initiate pilot studies to validate the GST data for specific industries, sectors, and regions.
• Alternatively, the NSO could consider reverting to ASI data, which now has a shorter time lag and could provide more reliable estimates for manufacturing GDP.

Conclusion

• Accurate GDP estimation is essential for assessing economic performance and informing policy decisions.
• While the incorporation of new datasets like GST holds promise, careful testing and validation are necessary to avoid the pitfalls of past revisions.
• Ensuring the accuracy of GDP estimates will reinforce confidence in the economic data used by policymakers, researchers, and the public.

Q1. What is the difference between GDP & GVA?

The main difference between gross domestic product (GDP) and gross value added (GVA) is that GDP is a measure of a country's economic health, while GVA is a measure of a company, sector, or region's contribution to the economy.

Q2 What is Gross national income (GNI)?

Gross national income (GNI) is a statistic that measures the total value added claimed by a country's residents over a period of time. It's also known as gross national product (GNP).

Source: On the pitfalls of estimating GDP