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India's Change In GDP Calculation Method Seems Highly Sensible
By Tim Worstall, Contributor, 4/18/2015 @ 1:55AM
There’s a little bit of confusion over India’s GDP growth statistics at present. The country recently changed the way that it calculates this number and while there are, obviously, the usual teething problems with changing the method by which such a complex number is arrived at the basic change seems most sensible. For the real difference in what they’re doing is that they’re now calculating the value that consumers get to enjoy and not the value that producers are consuming. Given that we want to know is how well off are the people this seems like a move in the right direction.
This is causing confusion though:
Ashish Kumar, the head of country’s statistics office, has faced two months of questioning about how a new way of measuring GDP created the world’s fastest-growing major economy overnight.
It’s unlikely to end any time soon.
Until early February, when Kumar’s office changed the way it measures economic activity, the Indian economy was enduring its weakest run of growth since the mid-1980s. Now it is outpacing China, having grown an annual 7.5 per cent in the fourth quarter of last year.
Well, obviously, there’s going to be a few eyebrows raised when a change is rolled out that just proves that all is hunky dory. A little like the revelation by both Ghana and Nigeria recently that their economies were in fact very much larger than everyone thought as a result of similar types of changes in the calculation methods. However, in those African cases the changes were entirely justified: they’d been working on very old estimates of what the structure of the economy was and they really did need to update them.
We can go back a couple of months and have a look at what the Indian statistical office has done:
The Indian statistics ministry said that after updating the base year used for marking trends in the economy and switching to a market-price calculation of gross domestic product, the economy grew by 6.9% in the year that ended last March. Using the previous methodology, GDP expansion that year was 4.7%. China’s economy grew by 7.4% in the 2014 calendar year.
Since January 2010, the base year for India’s statisticians had been the 12 months that ended in March 2005. From now on, it will be the year that ended March 2012. The revised calculation also incorporates more-comprehensive data on corporate activity and newer surveys of spending by households and informal businesses.
There’s that good news again. And changing the reference year has a few people confused: it shouldn’t make any difference but it does, and how much it does isn’t entirely clear as there’s no historical series been created as yet that uses this new method. So, we can compare either the old numbers under the old method, or the new under the new, but not the old under the new method which is something we’d really like to be able to do. That historical series is expected around year end. So there’s a blip or two in he implementation here. However, this part of the change seems eminently sensible:
India now measures GDP by market prices instead of factor costs, to take into account gross value addition in goods and services as well as indirect taxes. The base year has been shifted to 2011/12 from 2004/05 earlier.
The government’s statistics department says the new method is more in line with global practices and gives a better picture of economic activity.
Yes, this is more in line with global practices and there’s a very good reason for that being the way that everyone else does it. This is a bit of speculation, but the older method might well come from the way in which Nehru and others, the builders of independent India, were so fascinated by Fabian socialism and even aspects of the Russian version. In the sense that it was production of stuff and things that was what they thought should be measured (of course, the Soviets went entirely overboard with this idea but then that’s the Soviets for you. They measured the value of output by the tonnage of it. Rather than by the obvious method of measuring the value of it although they did have at least one excuse, which is that in a non-market economy there’s no simple way of calculating value).
However it came about measuring at factor prices means measuring the resources used to produce things. And yes, this ought to have some relationship to the value that consumers place upon their ability to consume but it’s not a direct one to one relationship. And given that our aim with having an economy in the first place is to enable the citizenry, the people, to live the best life possible we really do want to be measuring their consumption opportunities, not the resources consumed in providing them.
Thus this basic change looks entirely sensible. India is now measuring GDP as what Indians can consume. Yes, despite it providing a lovely boost to the numbers at just the right time, it’s still a sensible change.
Source:- India's Change In GDP Calculation Method Seems Highly Sensible - Forbes
