New Delhi. India is counted among the fastest growing economies in the world, but its GDP numbers are mired in controversy every year. The reason is not just the growth rate but the method of calculating it which has been in question continuously for the last decade. After changing the base year in 2015 and introducing a new data system, India’s GDP has suddenly jumped several times, which shocked economists and international agencies.
On the other hand, the government claims that this entire process is based on international standards and improvements are being made continuously in it. Yet the questions remain unresolved as the data sources are still incomplete, especially due to discrepancies in the MCA21 database of millions of companies and the unorganized sector. This is the reason why India’s GDP numbers stir up new debates every few years.
How does India calculate GDP?
India calculates GDP in three ways but the official number comes from Production Approach. In this method, the value added of all three sectors – agriculture, industry and services – is counted, which reveals the real size of the economy. Apart from this, expenditure method i.e. Expenditure Approach and income method i.e. Income Approach also exist but their weight is less in India.
In Expenditure Approach, GDP is calculated from the formula of C plus I plus G plus X minus M. Whereas in Income Approach, GDP is calculated by adding the income, salary, profit, rent and interest of the entire country. All three methods are accepted internationally but in India only the production method is considered official.
How the method changed in 2015 and why there was controversy
India changed the base year of GDP to 2011-12 in 2015 and implemented the new method. This is where the controversy started because the growth of many sectors suddenly started showing up. Whereas earlier only data of big factories was included, now the balance sheets of more than five lakh companies started being included in the MCA21 database.
After this, GDP at Market Prices was adopted instead of GDP at Factor Cost, in which the final number is formed by adding or subtracting indirect taxes and subsidies. This naturally makes GDP appear slightly higher. This was the reason that when the revised data came in 2015, the growth for 2013-14 went from 7.4 to 8.5 percent and a whole debate started.
Why does the controversy increase every year?
Even in the year of demonetization, GDP was shown at 8.2 percent which surprised many economists. Similarly, the difference between GDP decline and recovery at the time of COVID was also not matching with other data sources. The biggest issue is the MCA21 database in which thousands of closed or shell companies are still seen active, which raises suspicion of manipulation in GDP.
Apart from this, about 45 percent of India’s economy is in the unorganized sector for which there is no real time data. It is included only through surveys and estimates. Moreover, there is often a difference of 5 to 10 percent between expenditure GDP and production GDP, which is the highest in the world.
what’s going to change next
The government is preparing to bring a new base year in 2025-26 which will probably be 2023-24. With the new base year, GST data will include Aadhaar data and real-time business updates, which can make GDP look more accurate. However, this also means that once again there may be a sudden jump in the GDP numbers and the debate may start again.
