[Editorial Analysis] Politics and numbers

Mains Paper 3: Economic Development

Prelims level: WRT GDP

Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth,
development and employment. Inclusive growth and issues arising from it

Context

• GDP changes to a new series are routine, and have occurred at least six times in India, and never before with any discussion.

• Base-year changes occurred in 1960/61, 1970/71, 1980/81, 1993/94, 1999/00, 2004/5 and now 2011/12.

• The lowering of GDP growth for 2004/5 to 2011/12 was entirely expected.

• Primarily because of the surprise low employment growth between 2004/5 and 2011/12.

• There is one large sector of the economy wholesale and retail trade (WRT) whose GDP estimation is directly dependent on employment data.

• This sector, in the old 2004-5 series, accounted for 16 per cent of GDP; in the new 2011-12 series, it accounts for only 11 per cent.

Why this large decline in the share of this sector?

• Let us look at the traditional method of estimating WRT GDP.

• On the release of the NSSO employment data (approximately every five years) the CSO looked at the employment gains of this sector and assuming some productivity growth of the labour arrived at an estimate of the sector’s GDP.

• In 1999/00, there were 34.4 million people working in WRT, and this figure increased to 41.7 million in 2004/5 yielding an annual growth rate in employment of 3.9 per cent per annum.

• Total employment in the economy increased at a CAGR of 2.4 per cent per annum.

• GDP growth for this period: 5.5 per cent per annum, implying an average productivity growth of 2.1 per cent per annum.

Key highlights measured by CSO

• This healthy growth in employment was assumed by the CSO in making estimates until the next major NSSO survey, in 2011/12, became available.

• However, the results of the 2011/12 NSSO survey were a shocker for employment gains.
• For the period 2004/5 to 2011/12, NSSO data revealed a total job gain of only 9 million (from 419 million to 428 million).

• Nine million over seven years translates into a CAGR of only 0.3 per cent per annum.

• GDP growth for this period: 8.1 per cent per annum, implying an average productivity growth of 7.8 per cent.

• Some acceleration in labour productivity growth was expected, given the large increase in investment — but 7.8 per cent?

• This was the first broad hint that there was some overstatement in the GDP series for the UPA period.

• For WRT, the growth in employment was even lower than the aggregate — only 0.2 per cent per annum.

• The CSO (and international advisers) rightly got down to the task of changing the method of estimating GDP for the WRT sector.

• They rightly converged on using growth in real sales tax revenue as an indicator.

How much difference does the new and improved method make?

• This large decline in the share can only mean that growth in the WRT sector was significantly lower than growth in the non-WRT sector.

• The new CSO back series projects GDP growth to be 6.6 per cent per annum, FY05 to FY12, versus the 8.1 per cent contained in the old GDP series.

• Inflation (as measured by the GDP deflator) between FY05 and FY12 has also been corrected.

• The deflator is a weighted combination of the WPI and CPI inflation indices.

• The two increased at a CAGR rate of 6.4 and 7.9 per cent respectively between FY05 and FY12.

Way forward

• However, the old GDP deflator has an average inflation rate of only 6.7 per cent.

• A mid-point of the CPI and WPI inflation yields 7.2 per cent, that is, GDP deflator was underestimated by around 50 bp in the old series.

• These two simple computations suggest that any back series earlier than 2011/12 should lower GDP growth.

• The CSO estimate, incorporating all factors, is a very credible estimate.

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Prelims Questions:

Q.1) The Economic Survey is complied by:

a) Office of economic advisor.

b) Central Statistical office ( CSO )

c) National Sample Survey Organization (NSSO)

d) Department of economic affairs.

Answer: D

Mains Questions:

Q.1) How much difference does the new and improved method make in context of GDP growth?

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