The problem with rebasing GDP estimates (Debate on base year change)

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 The problem with rebasing GDP estimates (Debate on base year change)

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• New base year 2017-18: To calculate the national incomes, perhaps India will soon dump the 2011-12 base year (introduced in 2015) and move to 2017-18. The CSI awaits the ASI and CES results to do it. As such, this is a regular exercise for any nation.
• (CSI - Chief Statistician of India; ASI - Annual Survey of Industries; CES - Consumer Expenditure Survey)
• Abnormal times: Sadly, past 4 years have seen a big debate over sanctity of national income data itself. Questions exist over databases used and methodologies adopted. Today, Q1 GDP for FY 2019-20 is at 5%, but experts say actual rate is much lower. Ex CEA claimed that authentic real-GDP growth may be 0.36% to 2.5% lower.
• Re-basing dynamics & dispute: It started in 2015.

1. The CSO released the 2011-12 base year series, replacing earlier series of 2004-05 base year.
2. Change is always done every 7-10 years, to adjust for changed structures, and relative prices.
3. Due to re-basing, absolute GDP value usually goes up a bit, as domestic production data is better captured.
4. But growth rates do not change much, because underlying pace of expansion has not changed (for the past).

• 2011-12 revision was different: What happened was that GDP for 2011-12 shrunk by 2.3% (compared to 2004-05 series), and annual GDP growth rate went up from 4.8% to 6.2% (for 2013-14). Even for mfg., rate changed from (-) 0.7% to +5.3% for 2013-14, which is wrong, as nothing really changed (bank credit growth, capacity utilisation, fixed inv. growth, etc.)
• Demo became positive: The 2016 November demonetisation exercise sharply hit output and employment (most experts felt), but GDP for 2016-17 grew at 8.2% (highest for 10 years). That is impossible. Another indicator: private sector investments in 2016-17 dropped to 2.8% growth, compared to 7.5% in 2015-16 (as per actual company IT returns). IMF also spoke of demo hurting GDP growth.
• Specific criticism of new data:

1. For the first time, the CSO estimated 'value addition in private sector' using MCA data (Min. of Corporate Affairs). This database is considered unreliable
2. Pvt. corporate sector gives 1/3rd of GDP, and of that, half is from manufacturing. Was output over-estimated?
3. Many firms considered "active" (returns filed for 3 years) are actually "inactive". So was data extrapolation fundamentally invalid?

• Impacting SDP: The calculation of state domestic products (SDPs) too use national level methods only, and their quality has suffered too.

1. MCA data lacks factory identifiers (location of units) but has company HQ data only - so complete distortion happens between states
2. Estimation of informal sector value addition –  There are no state-specific labour productivity estimates in 2011-12 series (so wrong estimates made)

• No problems at all: CSO refuses to accept any of these criticisms. It claims that global best practices are being used (UN System of National Account guidelines). But that was followed earlier too, and larger datasets may not necessarily be correct.
• Latest change to 2017-18: If there was a problem with 2011-12 series, how will 2017-18 rectify it? The immediate aftermath of demonetisation will make it more skewed. Time to form an independent committee of experts now, or else the entire credibility of national income statistics will be lost.
• Summary : Structural inconsistencies in the 2011-12 base year national income statistics have not been rectified, and CSO is planning to move on to the 2017-18 series.

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