Points to Remember:
- Pre-2015 GDP Calculation: Based on the factor cost method, with limitations in data collection and coverage.
- Post-2015 GDP Calculation: Shifted to the market price method, incorporating a wider range of economic activities and improved data collection techniques.
- Key Changes: Methodology shift, base year revision, and improved data collection.
- Impact: Significant increase in GDP figures, improved accuracy and international comparability.
Introduction:
India’s Gross Domestic Product (GDP) calculation methodology underwent a significant overhaul in 2015. Before 2015, the GDP was calculated primarily using the factor cost method, which valued goods and services at their production cost, excluding indirect taxes and adding subsidies. This method, while simpler, suffered from limitations in data collection, particularly regarding the informal sector, which constitutes a substantial part of the Indian economy. The change to the market price method, adopted after 2015, aimed to address these shortcomings and provide a more accurate and internationally comparable measure of economic output. This shift also involved a change in the base year for calculating GDP, providing a more up-to-date reflection of the Indian economy’s structure.
Body:
1. Methodology Shift: Factor Cost vs. Market Price:
- Pre-2015 (Factor Cost): GDP was calculated at factor cost, meaning the value of goods and services was measured at their production cost, excluding indirect taxes and including subsidies. This approach underestimated the true market value of goods and services.
- Post-2015 (Market Price): The methodology shifted to the market price method, which values goods and services at their final selling price to consumers, including indirect taxes and excluding subsidies. This provides a more comprehensive picture of the economy’s size and performance, aligning with international standards.
2. Data Collection and Coverage:
- Pre-2015: Data collection was limited, particularly for the informal sector, leading to underestimation of the actual GDP. The reliance on outdated surveys and limited sampling techniques contributed to inaccuracies.
- Post-2015: The Central Statistics Office (CSO) implemented improved data collection techniques, including larger sample sizes, more frequent surveys, and better integration of data from various sources. Efforts were made to incorporate a wider range of economic activities, including the informal sector, although challenges remain.
3. Base Year Revision:
- Pre-2015: The base year for GDP calculation was relatively old, leading to an inaccurate representation of the economy’s structure and growth. The older base year did not reflect the changes in the composition of the economy.
- Post-2015: The base year was revised to provide a more current and relevant picture of the Indian economy. This revision helped to better reflect the changing weights of different sectors in the economy. For example, the shift from an agricultural to a service-based economy was better captured.
4. Impact of the Changes:
- The shift in methodology resulted in a significant upward revision of India’s GDP figures after 2015. This was not necessarily an indication of sudden economic growth, but rather a reflection of a more accurate and comprehensive measurement of economic activity. The increased GDP figures improved India’s ranking in global economic comparisons.
- However, the change also led to some criticism, with concerns raised about the reliability of the new data and the potential for overestimation. The challenges of accurately measuring the informal sector remain.
Conclusion:
The change in India’s GDP calculation methodology from factor cost to market price in 2015, coupled with improved data collection techniques and base year revision, significantly impacted the reported GDP figures. While the shift aimed to provide a more accurate and internationally comparable measure of economic output, challenges remain in accurately capturing the contribution of the informal sector. Moving forward, continuous improvement in data collection methods, regular base year revisions, and greater transparency in the methodology are crucial for maintaining the credibility and reliability of India’s GDP figures. This will contribute to better policymaking and a more holistic understanding of the nation’s economic progress, aligning with the goals of sustainable and inclusive development.