Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. UPSC 2021, 10 Marks

Q1. भारत की सकल घरेलू उत्पाद (जी.डी.पी.) के वर्ष 2015 के पूर्व तथा वर्ष 2015 के पश्चात् परिकलन विधि में अन्तर की व्याख्या कीजिए  (150 शब्दों में उत्तर दीजिए)
Q1. Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (Answer in 150 words) 10

Answer: GDP is an abbreviation for Gross Domestic Product. GDP is defined as a measure of the value of economic activity within a country. In layman’s terms, GDP is the sum of the final prices of goods and services produced in an economy during a given period.

What changes were made in GDP calculation in the year 2015?

  • In 2015, a new series was announced to calculate GDP by upgrading the methodology with new data sources to meet UN standards, and since then, there have been concerns about the measure’s suitability and accuracy.
  • With the change to the new base year, the economy’s growth rate for 2013-14 was estimated to be 6.9 percent, up from 4.7 percent in 2004-05. Similarly, the 2012-13 growth rate was revised up to 5.1 percent from 4.5 percent.
  • The base year in the most recent series was changed from 2004-05 to 2011-12, and a new data series, MCA-21, was used for the organized private sector.
  • It contained information on all companies registered with the Ministry of Corporate Affairs, and each was assigned a unique 21-digit code, thus MCA-21. Furthermore, the new database is far more comprehensive, covering financial institutions as well as regulatory bodies such as SEBI, PFRDA, and IRDA.
  • This series includes a number of local organizations and institutions.
  • Informal Sector: The lack of annual surveys, particularly to cover changes in the informal sector, was a problem shared by both the old and new series. The previous method employed a Labor Input (LI) method, which employs a benchmark-indicator process and then computes output as the estimated labor input multiplied by the value added per worker. The new method employed the Effective Labor Input (ELI) method, which differentiates workers based on productivity by assigning weights to various worker categories.

Old Method Vs New Method

  • IIP was used to measure manufacturing and trading activity in the previous system. This accounted for changes in volume but not in value. We use the concept of GVA – Gross Value Added – in the newer methodology to measure the value addition done to the economy.
  • In the previous system, GDP was estimated using IIP data and then updated using ASI data (Annual Survey of Industries). ASI accounted only for those firms which were registered under the Factories Act. Data from MCA 21 is used in the newer system (MCA 21 is an e-governance initiative of the Ministry of Corporate Affairs that was launched in 2006 and allows firms/companies to electronically file their financial results).
  • Previously, farm produce was used as a proxy for calculating agricultural income. The new methodology has broadened the scope for calculating value addition in agriculture.
  • In the previous system, very few mutual funds and NBFCs were considered when evaluating financial activity. The new methodology broadens the coverage by including stockbrokers, asset management funds, pension funds, stock exchanges, and so on.
  • The previous system used trading income data from the NSSO’s 1999 establishment survey, whereas the new series uses data from the 2011-12 survey.

The new method is statistically more robust because it estimates more indicators such as consumption, employment, and enterprise performance, as well as factors that are more responsive to current changes.

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