Introduction

India’s Gross Domestic Product (GDP) is set for a revision, with the base year expected to change from 2011-12 to 2020-21. A key consideration in this revision is whether to incorporate Goods and Services Tax (GST) data for estimating value addition, replacing the Ministry of Corporate Affairs’ MCA-21 database for the Private Corporate Sector (PCS). This shift could bring major implications for the accuracy and credibility of India’s GDP estimates, making it a timely issue for scrutiny.

Gross Domestic Product (GDP)

• GDP is one of the most critical metrics for assessing a country’s economic size and health.  It serves as a universal benchmark for comparing economic indicators across nations and regions.
• Since GDP is usually measured at “constant” prices—i.e., real GDP, adjusted for price changes—it requires frequent revisions to reflect changes in the economy. This is achieved by changing the base year, which happens roughly every 5-10 years.
• The current GDP series, with a base year of 2011-12, is up for revision, and 2020-21 has been proposed as the new base year. While most necessary datasets are available, the Census data has yet to be released.
• One significant change being considered by the National Statistical Office (NSO) is replacing the MCA-21 data with GST data to estimate value-added contributions from the private corporate sector.
• However, given the challenges experienced in the previous base year revision, this shift must be approached cautiously.

Why Shift to GST Data?

• In the previous revision, the NSO moved from relying on the Annual Survey of Industries (ASI) and RBI’s sample of large companies to the MCA-21 database for GDP estimation. This was done to address gaps in capturing value-added contributions outside traditional factory premises and to account for the growing PCS.
• However, the shift to MCA-21 led to discrepancies in GDP estimates, particularly in manufacturing growth. For instance, while the previous GDP series showed a negative growth rate for manufacturing in 2013-14, the new series based on MCA-21 data suggested a positive growth of 5.4%, raising widespread concerns about overestimation.

Systematic Overestimation Concerns

• Further analysis comparing the Gross Value Added (GVA) and Gross Fixed Capital Formation (GFCF) in manufacturing, as per the National Accounts Statistics (NAS) and the ASI, revealed systematic overestimation in NAS figures.
• From 2012-13 to 2019-20, NAS showed an average annual GVA growth rate of 6.2%, while ASI data suggested a much lower 3.2%. Similarly, NAS reported a GFCF growth of 4.5%, while ASI showed a mere 0.3%.
• These discrepancies point to possible flaws in the MCA-21 dataset, raising doubts about the reliability of current GDP estimates.

The Risks of Using GST Data

• Given the concerns raised during the last revision, the proposed shift to GST data for GDP estimation must be handled carefully.
• Although GST data is vast and regularly updated, it has not been thoroughly analyzed or cross-validated for its suitability in estimating value addition across industries, sectors, and regions.
• Using an unverified dataset could lead to similar, or even more severe, discrepancies than those experienced with MCA-21.

A Way Forward

1. Before incorporating GST data, the NSO must conduct pilot studies to validate its reliability for specific sectors and states.
2. Additionally, systematic analyses and cross-validation by independent agencies should be prioritized to ensure the accuracy of GDP estimates.
3. Alternatively, the NSO could consider reverting to the ASI for estimating manufacturing GDP, as its database now comes with a shorter time lag.
4. While GST data holds the potential to transform GDP estimation, it is imperative that the NSO avoids rushing into untested methodologies.
5. Rigorous testing and transparency are essential to instill confidence in the GDP figures and safeguard the integrity of India’s national accounts.

Conclusion

Accurately estimating GDP is crucial for understanding a country’s economic health and guiding policymaking. As India prepares to revise its GDP base year, the shift from MCA-21 to GST data could offer improved coverage, but it must be approached with caution. Adequate validation, transparency, and careful cross-checking are necessary to avoid the pitfalls of overestimation and ensure that India’s economic picture remains reliable and accurate.