How is India’s GDP calculated?

The Gross Domestic Product (GDP) seems to be the godfather of all economic indicators. Economists, bankers, businesses, investors, policy-makers, politicians, the media, all seem obsessed with this number, whose single- or double-digit increments can spark much hysteria and generate talking points for many of these actors.

This is what happened after the Central Statistics Office (CSO, Ministry of Statistics and Programme Implementation) released GDP estimates for the Third Quarter (October-December) of 2013-14 on the last day of February. This was the last major data release before the general elections, and the rather poor 4.7% rise in GDP accompanied with a contracting industrial output and an investment slowdown, indicated bad times ahead for the nation. It also served as a gentle reminder of Standard & Poor’s warning to India a few months ago, that we could face a downgrade if the elections fail to produce a government capable of reviving growth.

This may be a good time to answer the question: How is the GDP calculated (or measured, estimated, determined…)? We know it is “the total value of all goods and services produced within the country during a given year,” but not many understand how we arrive at the actual figure(s). Many mistakenly believe that the government only uses tax data; it does not. Some also think that other agencies such as the Reserve Bank of India and the Prime Minister’s Economic Advisory Council calculate the GDP independently; they don’t, and instead use CSO figures, though they may forecast or work out projections of growth in GDP. Large financial institutions also make GDP forecasts regularly (one just did). And there isn’t just one figure for the GDP.

Who collects the data?

The CSO is responsible for coordination of statistical activities in the country, including National Income Accounting; conduct of Annual Survey of Industries, Economic Censuses, compilation of Index of Industrial Production, Consumer Price Indices etc. The most important indices used for compilation of GDP are Index of Industrial Production (IIP), Wholesale Price Index (WPI), and Consumer Price Indices – for Industrial Workers (CPI-IW), Agricultural Labourers (CPI-AL) and Rural Labourers (CPI-RL).

This data is compiled by central and state ministries, independent departments, and other governmental organisations. For example, the Industrial Statistics Unit at the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, provides production data to the CSO for compiling IIP. Similarly, commodity-wise data on import-export, production, crop, area, WPI, CPI etc. is collected and analysed by the Price Monitoring Cell, Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution.

The calculation

In India, GDP is calculated in two different ways:

  • By economic activity (at factor cost)

This figure is derived by breaking down the economy into different sectors and calculating the net increment in value in each sector. The data for this year is in the table that follows:

Industry GDP at factor cost(INR in crores) Percentage Change
Q3, 2012-13 Q3, 2013-14 2013-14
1. Agriculture, forestry & fishing 241556 250316 3.6
2. Mining & quarrying 27400 26960 -1.6
3. Manufacturing 215582 211540 -1.9
4. Electricity, gas & water supply 25799 27090 5
5. Construction 106094 106726 0.6
6. Trade, hotels, transport & commn. 367319 382998 4.3
7. Financing, ins., real est. & bus. servs. 261960 294751 12.5
8. Community, social & personal servs. 166073 177771 7
1411784 1478152 4.7

 

  • By expenditures (at market price)

This method simply adds up the market value of all domestic expenditures made on final goods and services in a single year, including consumption expenditures, investment expenditures, government expenditures, and net exports. Add all of the expenditures together and you determine GDP. This data is useful to understand government spending as well as trends in investment. As per the latest release:

Item GDP at Market Prices (INR in crores)
Private Final Consumption Expenditure 981463
Government Final Consumption Expenditure 190713
Gross Fixed Capital Formation 497120
Change in Stocks 26692
Valuables 41085
Exports 389655
Less Imports 484157
Discrepancies -47279
GDP at market prices 1595293

Each of these is measured in two ways as well:

  • Nominal GDP (at current prices): This is GDP calculated using current prices, and does not take inflation into account. Thus, even if there’s no actual increase in production or value created, inflation would lead to a continuous rise in nominal GDP.
  • Real GDP (at 2004-05 prices): The nominal GDP thus doesn’t make much sense as an indicator of economic growth. GDP is instead calculated on prices with respect to a given base year and these inflation adjusted prices give a true or ‘real’ account of economic growth. The base year is changed periodically to account for structural changes in the economy, and since Jan 2010, we have been using 2004-05 prices.

Thus, a total of four different figures are released for GDP.

While the real GDP calculated using either method should amount to the same in theory, a slight difference usually exists. The GDP at factor cost at constant (2004-05) prices for Q3 of 2013-14 is estimated at 14.8 lakh crore, as against 14.1 lakh crore in Q3 of 2012-13, showing a growth rate of 4.7 percent. This is the figure that drives policy decisions as well as the media discourse.

Indian Workers

By Imre Solt licensed under CC-BY-SA-3.0, via Wikimedia Commons

You can draw your conclusions about the economy based on this data, but the dismal science has never been this dismal in my lifetime so far. We did not even touch 5%, agriculture disappointed, and manufacturing, mining & quarrying actually shrank.

By the time the next release of quarterly GDP estimate (for the quarter Jan-Mar, 2014) takes place, we’d already have a new government, presumably. And it’s all up to it to get us back on track.

(Cross-posted from my column at NewsYaps)