The central statistical organization that releases GDP data in 2 time series.
1. GDP at factor cost at constant (1999-2000) prices ( for Q3 of 2006-07 this value is 8.6 %)
2. GDP at factor cost at current prices.( for Q3 of 2006-07 this value is 14.1 %)
The first series data receives wider publicity. But it does not take into account the price change in the years after the base year. Similarly it does not take into account the price change before the base year also. Since it does not take into account the price change it does not get affected by inflation. In my opinion, the Whole Sale Price Index (base of 1993-94=100) might not have any impact on the GDP calculation of the first series.
The second series data considers the price change over the years. But the inflationary impact needs to be subtracted from it. GDP deflator is used for this purpose. Since we don’t use that indicator in our country instead i am considering the inflation (based on WPI ). The average inflation for Q3 of 2006-07 is approximately 5.5 (I don't have the exact figures). If you subtract it (from 14.1) the resultant GDP growth will be around 8.6 %.
The following are the possible limitations in the Indian GDP calculation methodology.
1. The effect of inflation might not be fully factored in the second time series described above (The methodology used for calculating inflation itself has some serious limitations.)
2. The Indian economy is not black and white. Most part of the economy is in between the two colours. i.e grey. It will be evident that only about 2% of the population pays income tax. How do you account the good / service that does not have a paper trail from production to consumption?
3. The output of unorganized sectors like Agriculture labourers, construction workers, artisans, house wives are not take into account.
4. There has been a lot of changes in the Indian economy and the world’s perception of India since the year 2000. Income from IT and IT-enabled services have increased significantly. Medical tourism to India has evolved. I don’t think these are accounted for in the GDP methodology.
The GDP methodology was adopted even by U.S as a measure on National output only from the year 1985. Before that, they were using only GNP. We should not be copying the approach from those western nations.
Earlier we had a bunch of economists who were looking at the soviet model for solutions. Now we have economists who are looking at the west for solutions.
In my humble opinion, our economic view and thought process should be indigenous. It should factor-in the ground reality of our nation. That’s what Mahatma Gandhi did during the freedom struggle.
Similarly, every aspect of our economic view, including GDP calculation methodology should be customized for the Indian conditions. Otherwise, it will be just a number that does not have great correlation with the actual economy.
Note: The central statistical organization does not describe its methodology used for GDP calculation in its website. The above article is based on my current understanding of the process.
1. GDP at factor cost at constant (1999-2000) prices ( for Q3 of 2006-07 this value is 8.6 %)
2. GDP at factor cost at current prices.( for Q3 of 2006-07 this value is 14.1 %)
The first series data receives wider publicity. But it does not take into account the price change in the years after the base year. Similarly it does not take into account the price change before the base year also. Since it does not take into account the price change it does not get affected by inflation. In my opinion, the Whole Sale Price Index (base of 1993-94=100) might not have any impact on the GDP calculation of the first series.
The second series data considers the price change over the years. But the inflationary impact needs to be subtracted from it. GDP deflator is used for this purpose. Since we don’t use that indicator in our country instead i am considering the inflation (based on WPI ). The average inflation for Q3 of 2006-07 is approximately 5.5 (I don't have the exact figures). If you subtract it (from 14.1) the resultant GDP growth will be around 8.6 %.
The following are the possible limitations in the Indian GDP calculation methodology.
1. The effect of inflation might not be fully factored in the second time series described above (The methodology used for calculating inflation itself has some serious limitations.)
2. The Indian economy is not black and white. Most part of the economy is in between the two colours. i.e grey. It will be evident that only about 2% of the population pays income tax. How do you account the good / service that does not have a paper trail from production to consumption?
3. The output of unorganized sectors like Agriculture labourers, construction workers, artisans, house wives are not take into account.
4. There has been a lot of changes in the Indian economy and the world’s perception of India since the year 2000. Income from IT and IT-enabled services have increased significantly. Medical tourism to India has evolved. I don’t think these are accounted for in the GDP methodology.
The GDP methodology was adopted even by U.S as a measure on National output only from the year 1985. Before that, they were using only GNP. We should not be copying the approach from those western nations.
Earlier we had a bunch of economists who were looking at the soviet model for solutions. Now we have economists who are looking at the west for solutions.
In my humble opinion, our economic view and thought process should be indigenous. It should factor-in the ground reality of our nation. That’s what Mahatma Gandhi did during the freedom struggle.
Similarly, every aspect of our economic view, including GDP calculation methodology should be customized for the Indian conditions. Otherwise, it will be just a number that does not have great correlation with the actual economy.
Note: The central statistical organization does not describe its methodology used for GDP calculation in its website. The above article is based on my current understanding of the process.
1 comment:
Well said.
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