GDP

GDP

GDP
GDP stands for Gross Domestic Product. The meaning of GDP is the measure of the value of the economic activity within the country. In simpler words, GDP is defined as the sum of the final prices of the goods and services produced in an economy in a given period. The GDP of India is around the U.S. $2.8 trillion in 2019. It is important to read the facts related to ‘GDP in India’ for the IAS Exam and this article will provide you with all such relevant facts.
What is GDP?
GDP’s full form is Gross Domestic Product is evaluated regularly to account for changing production structure, relative prices, and better recording of economic activities.
Background of India’s GDP
In January 2015, the government moved to a new base year of 2011-12 from the earlier the base year of 2004-05 for national accounts. The base year of national accounts had been revised earlier in January 2010.
In the new series, the Central Statistics Office (CSO) did away with Gross Domestic Product (GDP) at factor cost and adopted the international practice of valuing industry-wise estimates as gross value added (GVA) at basic prices.
With the move to the new base year, the growth rate of the economy for 2013-14 was estimated at 6.9%; it was 4.7% on the 2004-05 base. Similarly, the growth rate for 2012-13 was revised upwards to 5.1% from 4.5%.
Methods of Estimation of GDP
Back series can be generated in three ways based on the new GDP methodology by using the base data wherever available, based on a production shift approach and by projecting the old series using the base year 2004-05 forward and then adjusting it to the 2011- 12 base by comparing it with the new series.
Rebasing the GDP of India
This is done by the government often to ensure that the GDP represents the true picture of the economy in terms of structural changes, the importance of the various sectors’ contributions of the agriculture sector, etc. The Present rebasing has been done by CSO taking into consideration the recommendations given the SNA (System of National Accounts) published by the UN in 2008.
Old Method of Estimation of GDP vs New Method of Estimation of GDP
In the older system, IIP was used to measure manufacturing and trading activity. This accounted for the volume changes but not value changes. In the newer methodology, we use the concept of GVA – Gross Value Added, which measures the value addition done to the economy. In the older system, GDP was first estimated by using the IIP data and then updated using the ASI data (Annual Survey of Industries). ASI accounted only for those firms which were registered under the Factories Act. In the newer system, data from MCA 21 is used (MCA 21 is an e-governance initiative of the Ministry of Corporate Affairs, launched in 2006, it allows the firms/companies to electronically file their financial results. Under this data from more than 5,00,000 firms is collected)
In the older system, farm produce was taken as a proxy for the calculation of agricultural income. The new methodology has widened the scope for calculating value addition in the agricultural sector. In the older system, very few mutual funds and NBFCs were considered for considering the financial activity. In the new methodology, the coverage has been expanded by including stockbrokers, asset management funds, pension funds, stock exchanges, etc In the older system, the trading income data was used from the NSSO’s 1999 establishment survey against this new series uses the 2011-12 survey.
Issues/Concerns with the New Methodology
The revised data does not reflect the other macroeconomic parameters – tax revenues, credit growth, trade performance, corporate sales, profits, more importantly, the level of investment in the economy, etc. The MCA21 data was collected only from 2008, then how can it be used to compare the earlier growth/ production. The Bank Credit Growth has averaged 20.3% between FY07 to FY12 and 12.3% between FY13 to FY18, during the same tenure the GDP growth rates have averaged 6.7% and 6.9% respectively (against the older growth rates of 8% and 6.9% respectively).
There has been inconsistency even in the case of Investment Growth. Between FY07 to FY12, the growth rate of investment was 10.7% and 5.3% between FY13 to FY18. Tax collections between FY07 to FY12 has grown by 16.5% and then post that by 13.8%. There is a close relation between GDP growth and tax collection growth. With higher growth, tax collections increase. The inflation rate averaged 9.6% between FY07 to FY12 and 6.4% thereafter. If the growth was driven by higher demand then, there should have been a higher inflation rate in the second part.
The gross investment to GDP ratio was peaking at 38% (FY08 to FY11) during the UPA government against the 30.3% (FY15 to FY18) in the present government (as per the economic theory, higher investments, the higher and the growth in the GDP). So how can the GDP growth during the present government be higher than the previous government. This could happen in cases where the production becomes very efficient leading to lower ICOR (Incremental Capital Output Ratio). But during the present government the twin shocks – Demonetisation and GST – have ensured that this is not the case.
The exports during the UPA government boomed at an average growth rate of over 20% against the zero growth rates in the last four years. The data has been prepared from 2004-05 to 2010-11 and this coincides with the period of UPA govt.
Arguments in favour of the new methodology.
The decline in bank credit growth can be explained by Increased capital efficiency. Bank facilitating credit to the corporates through instruments such as commercial papers, bonds, etc Inconsistency in investment, increased economic efficiency, Decreased ICOR (Incremental Capital Output Ratio – measures higher/incremental amount of capital needed to increase the production by a unit). There is no uniform relationship between growth and investment. The cycle is revived through consumption and then investment kicks in. The tax collections could also have been varied because of various other factors such as higher compliance, changes in tax rates, etc.
GDP in India – Way Forward
Allow the CSO to independently calculate, seek feedback, and publish new data. The data/results should be realistic and reflective of the ground reality. If the CSO wants to make it more transparent, it can seek the opinion/involvement of experts. GDP is just a statistical tool. There should be more focus on inclusive growth rather than just growth. Inclusive growth entails not just the growth but also the benefits derived by the growth in the form of development. It doesn’t make any sense to have farmer suicides in Maharashtra which is one of the wealthiest states in India. This dichotomy can be seen where India is ranked 6th globally in terms of nominal GDP, top in terms of growth rates but 130th in the case of HDI and 108th in WEF’s Gender Gap Index.
As per Credit Suisse, the wealth of the top 1 percent has increased from 40% to 60% (between 2010 to 2016) and the top 10% owns 90% of the wealth. As per a report prepared by Azim Premji University, the growth for India has averaged 7% and the employment growth has been at 1%. Within this also the ones who are getting the formal jobs were receiving a decreasing share of total output. Though this would be very difficult, India could look into Chain Linking methodology or index. Wherein the developed economies keep updating their GDP calculation methodology very often. Moreover, the government has already announced that the base year is going to be changed likely to 2018-19 if it’s done then these numbers will be revised all over again.
Types
There are many different ways to measure a country’s GDP, so it’s important to know all the different types and how they are used. A country’s nominal GDP is the raw measurement that includes price increases. It’s also known as the “current-dollar” GDP because it is measured with current market prices. At the end of the first quarter of 2020, the nominal U.S. GDP was $21.538 trillion.
To get the real GDP, the Bureau of Economic Analysis (BEA) removes the effects of inflation. The real GDP allows economists to compare figures from different years. Otherwise, it might seem like the economy is growing when it’s actually suffering from double-digit inflation. The BEA calculates real GDP by using a price deflator, which tells you how much prices have changed since a base year. Incomes from U.S. companies and people from outside the country are not included, which removes the impact of exchange rates and trade policies. Real GDP is lower than nominal GDP, and at the end of the first quarter of 2020, it was $18.988 trillion.4 As of May 22, 2020, the BEA uses 2012 as the base year for its real GDP data.
The GDP growth rate is the percentage increase in GDP from quarter to quarter, and it changes as the economy moves through the business cycle. If the growth rate is negative, the economy contracts, and it signals a recession. If it contracts for years, that’s a depression. If the growth rate is too high, it creates inflation. The BEA provides the U.S. GDP growth rate monthly, and at the end of the first quarter of 2020, the U.S. nominal and real GDP decreased by 3.5% and 4.8%, respectively.
Some countries have a big GDP only because of their large population. GDP per capita is the best way to compare GDP between countries because it divides the GDP by the number of residents, and measures the country’s standard of living. In the first quarter of 2020, the U.S. GDP per capita was $57,621.7 The best way to compare GDP per capita by year or between countries is with real GDP per capita. This takes out the effects of inflation, exchange rates, and differences in population.
How GDP Affects people
GDP impacts personal finance, investments, and job growth. Investors look at a nation’s growth rate to decide if they should adjust their asset allocation, as well as compare country growth rates to find their best international opportunities. They purchase shares of companies that are in rapidly growing countries.
Interest Rates
The Fed implements expansionary monetary policy to ward off recession and contractionary monetary policy to prevent inflation. Its primary tool is the federal funds rate. For example, if the growth rate is increasing, then the Fed raises interest rates to stem inflation. The federal funds rate affects any interest rate you encounter in your life, from mortgages to personal loans to yields on your savings account. In this example, the Fed is raising rates, so you should lock in a fixed-rate mortgage. Your payments on an adjustable-rate mortgage would rise along with the fed funds rate.
Unemployment
If growth slows or becomes negative, then you should update your resume because low economic growth leads to layoffs and unemployment. It may take a few months to see the corresponding job loss because it takes time for executives to compile the layoff list and prepare exit packages, but when economic growth slows, it’s inevitable for many companies. This delay between economic growth rates and the impact on individual workers makes unemployment a lagging indicator.
Finding Opportunities During Downturns
The BEA offers breakdowns of GDP data that examine specific sectors and products. You can use these details to determine which sectors of the economy are growing and which are declining. Even during hard economic times, particular sectors continue to add jobs, such as the health care industry during the 2008 financial crisis. This report also helps you determine whether you should invest in, say, a tech-specific mutual fund instead of a fund that focuses on agribusiness.
Problems With GDP
The GDP is designed to measure the market value for all products and services within a country’s borders. Since the measurement hinges on market price, there are many aspects of society including many aspects that factor into economic well-being that aren’t included in the GDP numbers. One of the biggest criticisms of GDP it that it doesn’t count environmental costs. For example, the price of plastic is low because it doesn’t include the cost of pollution. GDP doesn’t measure how these costs impact the well-being of society. A more accurate measurement of a country’s standard of living may include environmental conditions.
Another criticism is that GDP doesn’t include unpaid services. It leaves out unpaid child care and volunteer work, for example, despite the significant impact they have on the economy and a country’s quality of life. GDP also does not count the shadow or black economy. It underestimates economic output in countries where many people receive their income from illegal activities. These products aren’t taxed and don’t show up in government records, and although they can estimate, they cannot accurately measure this output. One estimate that is referenced by the Bureau of Labor Statistics pegs the shadow economy’s size as 8.8% of the GDP.

What is GDP?

GDP’s full form is Gross Domestic Product is evaluated regularly to account for changing production structure, relative prices, and better recording of economic activities. 

Background of India’s GDP

  • In January 2015, the government moved to a new base year of 2011-12 from the earlier the base year of 2004-05 for national accounts. The base year of national accounts had been revised earlier in January 2010.
  • In the new series, the Central Statistics Office (CSO) did away with Gross Domestic Product (GDP) at factor cost and adopted the international practice of valuing industry-wise estimates as gross value added (GVA) at basic prices.
  • With the move to the new base year, the growth rate of the economy for 2013-14 was estimated at 6.9%; it was 4.7% on the 2004-05 base. Similarly, the growth rate for 2012-13 was revised upwards to 5.1% from 4.5%.

Methods of Estimation of GDP

Back series can be generated in three ways based on the new GDP methodology by using the base data wherever available, based on a production shift approach and by projecting the old series using the base year 2004-05 forward and then adjusting it to the 2011- 12 base by comparing it with the new series. 

Rebasing the GDP of India

This is done by the government often to ensure that the GDP represents the true picture of the economy in terms of structural changes, the importance of the various sectors’ contributions of the agriculture sector, etc. The Present rebasing has been done by CSO taking into consideration the recommendations given the SNA (System of National Accounts) published by the UN in 2008.

Old Method of Estimation of GDP vs New Method of Estimation of GDP

In the older system, IIP was used to measure manufacturing and trading activity. This accounted for the volume changes but not value changes. In the newer methodology, we use the concept of GVA – Gross Value Added, which measures the value addition done to the economy. In the older system, GDP was first estimated by using the IIP data and then updated using the ASI data (Annual Survey of Industries). ASI accounted only for those firms which were registered under the Factories Act. In the newer system, data from MCA 21 is used (MCA 21 is an e-governance initiative of the Ministry of Corporate Affairs, launched in 2006, it allows the firms/companies to electronically file their financial results. Under this data from more than 5,00,000 firms is collected)

In the older system, farm produce was taken as a proxy for the calculation of agricultural income. The new methodology has widened the scope for calculating value addition in the agricultural sector. In the older system, very few mutual funds and NBFCs were considered for considering the financial activity. In the new methodology, the coverage has been expanded by including stockbrokers, asset management funds, pension funds, stock exchanges, etc In the older system, the trading income data was used from the NSSO’s 1999 establishment survey against this new series uses the 2011-12 survey.

Issues/Concerns with the New Methodology

The revised data does not reflect the other macroeconomic parameters – tax revenues, credit growth, trade performance, corporate sales, profits, more importantly, the level of investment in the economy, etc. The MCA21 data was collected only from 2008, then how can it be used to compare the earlier growth/ production. The Bank Credit Growth has averaged 20.3% between FY07 to FY12 and 12.3% between FY13 to FY18, during the same tenure the GDP growth rates have averaged 6.7% and 6.9% respectively (against the older growth rates of 8% and 6.9% respectively).

There has been inconsistency even in the case of Investment Growth. Between FY07 to FY12, the growth rate of investment was 10.7% and 5.3% between FY13 to FY18. Tax collections between FY07 to FY12 has grown by 16.5% and then post that by 13.8%. There is a close relation between GDP growth and tax collection growth. With higher growth, tax collections increase. The inflation rate averaged 9.6% between FY07 to FY12 and 6.4% thereafter. If the growth was driven by higher demand then, there should have been a higher inflation rate in the second part.

The gross investment to GDP ratio was peaking at 38% (FY08 to FY11) during the UPA government against the 30.3% (FY15 to FY18) in the present government (as per the economic theory, higher investments, the higher and the growth in the GDP). So how can the GDP growth during the present government be higher than the previous government. This could happen in cases where the production becomes very efficient leading to lower ICOR (Incremental Capital Output Ratio). But during the present government the twin shocks – Demonetisation and GST – have ensured that this is not the case.

The exports during the UPA government boomed at an average growth rate of over 20% against the zero growth rates in the last four years. The data has been prepared from 2004-05 to 2010-11 and this coincides with the period of UPA govt.

Arguments in favour of the new methodology.

The decline in bank credit growth can be explained by Increased capital efficiency. Bank facilitating credit to the corporates through instruments such as commercial papers, bonds, etc Inconsistency in investment, increased economic efficiency, Decreased ICOR (Incremental Capital Output Ratio – measures higher/incremental amount of capital needed to increase the production by a unit). There is no uniform relationship between growth and investment. The cycle is revived through consumption and then investment kicks in. The tax collections could also have been varied because of various other factors such as higher compliance, changes in tax rates, etc.

GDP in India – Way Forward

Allow the CSO to independently calculate, seek feedback, and publish new data. The data/results should be realistic and reflective of the ground reality. If the CSO wants to make it more transparent, it can seek the opinion/involvement of experts. GDP is just a statistical tool. There should be more focus on inclusive growth rather than just growth. Inclusive growth entails not just the growth but also the benefits derived by the growth in the form of development. It doesn’t make any sense to have farmer suicides in Maharashtra which is one of the wealthiest states in India. This dichotomy can be seen where India is ranked 6th globally in terms of nominal GDP, top in terms of growth rates but 130th in the case of HDI and 108th in WEF’s Gender Gap Index.

As per Credit Suisse, the wealth of the top 1 percent has increased from 40% to 60% (between 2010 to 2016) and the top 10% owns 90% of the wealth. As per a report prepared by Azim Premji University, the growth for India has averaged 7% and the employment growth has been at 1%. Within this also the ones who are getting the formal jobs were receiving a decreasing share of total output. Though this would be very difficult, India could look into Chain Linking methodology or index. Wherein the developed economies keep updating their GDP calculation methodology very often. Moreover, the government has already announced that the base year is going to be changed likely to 2018-19 if it’s done then these numbers will be revised all over again.

Types

There are many different ways to measure a country’s GDP, so it’s important to know all the different types and how they are used. A country’s nominal GDP is the raw measurement that includes price increases. It’s also known as the “current-dollar” GDP because it is measured with current market prices. At the end of the first quarter of 2020, the nominal U.S. GDP was $21.538 trillion.

To get the real GDP, the Bureau of Economic Analysis (BEA) removes the effects of inflation. The real GDP allows economists to compare figures from different years. Otherwise, it might seem like the economy is growing when it’s actually suffering from double-digit inflation. The BEA calculates real GDP by using a price deflator, which tells you how much prices have changed since a base year. Incomes from U.S. companies and people from outside the country are not included, which removes the impact of exchange rates and trade policies. Real GDP is lower than nominal GDP, and at the end of the first quarter of 2020, it was $18.988 trillion.4 As of May 22, 2020, the BEA uses 2012 as the base year for its real GDP data.

The GDP growth rate is the percentage increase in GDP from quarter to quarter, and it changes as the economy moves through the business cycle. If the growth rate is negative, the economy contracts, and it signals a recession. If it contracts for years, that’s a depression. If the growth rate is too high, it creates inflation. The BEA provides the U.S. GDP growth rate monthly, and at the end of the first quarter of 2020, the U.S. nominal and real GDP decreased by 3.5% and 4.8%, respectively.

 Some countries have a big GDP only because of their large population. GDP per capita is the best way to compare GDP between countries because it divides the GDP by the number of residents, and measures the country’s standard of living. In the first quarter of 2020, the U.S. GDP per capita was $57,621.7 The best way to compare GDP per capita by year or between countries is with real GDP per capita. This takes out the effects of inflation, exchange rates, and differences in population. 

How GDP Affects people 

GDP impacts personal finance, investments, and job growth. Investors look at a nation’s growth rate to decide if they should adjust their asset allocation, as well as compare country growth rates to find their best international opportunities. They purchase shares of companies that are in rapidly growing countries.

  1. Interest Rates

The Fed implements expansionary monetary policy to ward off recession and contractionary monetary policy to prevent inflation. Its primary tool is the federal funds rate. For example, if the growth rate is increasing, then the Fed raises interest rates to stem inflation. The federal funds rate affects any interest rate you encounter in your life, from mortgages to personal loans to yields on your savings account. In this example, the Fed is raising rates, so you should lock in a fixed-rate mortgage. Your payments on an adjustable-rate mortgage would rise along with the fed funds rate.

  1. Unemployment

If growth slows or becomes negative, then you should update your resume because low economic growth leads to layoffs and unemployment. It may take a few months to see the corresponding job loss because it takes time for executives to compile the layoff list and prepare exit packages, but when economic growth slows, it’s inevitable for many companies. This delay between economic growth rates and the impact on individual workers makes unemployment a lagging indicator.

  1. Finding Opportunities During Downturns

The BEA offers breakdowns of GDP data that examine specific sectors and products. You can use these details to determine which sectors of the economy are growing and which are declining. Even during hard economic times, particular sectors continue to add jobs, such as the health care industry during the 2008 financial crisis. This report also helps you determine whether you should invest in, say, a tech-specific mutual fund instead of a fund that focuses on agribusiness.

Problems With GDP

The GDP is designed to measure the market value for all products and services within a country’s borders. Since the measurement hinges on market price, there are many aspects of society including many aspects that factor into economic well-being that aren’t included in the GDP numbers. One of the biggest criticisms of GDP it that it doesn’t count environmental costs. For example, the price of plastic is low because it doesn’t include the cost of pollution. GDP doesn’t measure how these costs impact the well-being of society. A more accurate measurement of a country’s standard of living may include environmental conditions.

Another criticism is that GDP doesn’t include unpaid services. It leaves out unpaid child care and volunteer work, for example, despite the significant impact they have on the economy and a country’s quality of life. GDP also does not count the shadow or black economy. It underestimates economic output in countries where many people receive their income from illegal activities. These products aren’t taxed and don’t show up in government records, and although they can estimate, they cannot accurately measure this output. One estimate that is referenced by the Bureau of Labor Statistics pegs the shadow economy’s size as 8.8% of the GDP.

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