Business Standard


The raging debate may boil down to what you are looking for


The gross domestic product (GDP) series introduced in 2015 has triggered many debates. It changed not only the base year from 2004-05 to 2011-12 but also the methodolog­y to compute the numbers. The debate over the relative relevance of gross value added (GVA) and GDP as the true indicator of economic performanc­e is not new, but it has been accentuate­d by the recent national account numbers released by the statistics office.

Though the GVA growth, as expected, fell to 6.5 per cent during the third quarter of the current financial year (Octoberdec­ember 2023) from 7.7 per cent during the second quarter (July-september), the GDP growth rate rose to a six-quarter high of 8.4 per cent during October-december, compared to 8.1 per cent in Julyseptem­ber.

Also, the GVA growth pegged for 202324, by the second Advance Estimates, was modest, at 6.9 per cent for 2023-24 against the actual number of 6.7 per cent for the previous year. On the other hand, the projected GDP growth was way higher at 7.6 per cent against 7 per cent during this period. The projected GDP growth rate was also higher than the 7.3 per cent pegged by the first Advance Estimates, whereas the GVA growth was projected at the same level by both the Advance Estimates.

Factor cost, market prices

The concept of the gross value added was introduced by the GDP series with a base year of 2011-12. Prior to that, there used to be GDP at factor cost (GDPFC) and GDP at market prices (GDPMP). GDPMP still exists in the 2011-12 series and is the only indicator of GDP.

However, in the earlier series the main indicator of GDP growth for official purposes was GDPFC. It used to be taken, at constant prices, as the real GDP growth; GDPMP at current prices was considered for the nominal GDP growth.

The summation of output in value terms of main activities — agricultur­e, industry, services (including those provided by the government) — used to give the GDPFC. It did not include any taxes. The addition of the net production and product taxes to GDPFC used to bring in the GDPMP. In net taxes, subsidies are taken out.

Those days, too, there used to be some confusion when the official GDP growth rates were compared to those given by internatio­nal agencies such as the Internatio­nal Monetary Fund (IMF). The confusion arose because the IMF would take GDPMP at constant prices as the GDP growth rate.

Now, that confusion has been sorted out by the 2011-12 series. However, newer issues have arisen, since GDPFC was replaced by the GVA at basic prices.

GVA at basic prices is the summation of value added by the main sectors of the economy — agricultur­e, industry, and services — but it also contains net production taxes, unlike GDP at factor cost.

Production taxes are paid independen­t of the volume of the actual production, such as land revenues, stamps and registrati­on fees, and tax on profession. Similarly, production subsidies include the subsidies to the Railways, input subsidies to farmers, subsidies to village and small industries, and administra­tive subsidies to corporatio­ns or cooperativ­es.

GDPMP is derived by adding net product taxes to GVA at basic prices. Product taxes are paid per unit of the product concerned, such as the goods and services tax (GST), excise, customs duty, etc. Product subsidies are given on food, fertiliser­s, petroleum, as well as interest.

Now, the issue arises as to whether one should take the GVA growth at constant prices as the true indicator of the performanc­e of the economy or GDPMP at constant prices. If one takes the GVA growth, the economy has done reasonably well in the third quarter of the current financial year. But if the GDP growth is considered, the economy has done extremely well in the quarter. That is also true for the second Advance Estimates for the entire 2023-24.

What are you looking for?

Pronab Sen, chairperso­n of the Standing Committee on Statistics, says it depends on what you are looking at. GVA, he says, is what the producers of goods and services get, and GDP is the sum total of the income generated in the economy.

“It depends on what you are looking at. GVA is a proxy for production and gauges how producers are doing. GDP is the income generated in the economy,” he explains.

Sen attributes the huge difference in growth rates in the GDP and GVA to the substantia­l fall in product subsidies. According to figures derived from the data released by the Controller General of Accounts (CGA), major subsidies — on food, fertiliser­s, and petroleum — at ~70,409 crore, fell 53.6 per cent during the third quarter of the current financial year over the ~1.52 trillion in the correspond­ing period of the previous year.

Growth in net indirect taxes was a sixquarter high of 32 per cent in the third quarter of 2023-24. Before this, the growth was higher, at 37.6 per cent, in the first quarter of 2022-23, but that was due to the low base of the previous year.

This trend is transient and may not sustain beyond one quarter more, Sen points out. Also, the projected growth in net indirect taxes is the highest in 202324, at least since 2016-17.

However, as far as Advance Estimates are concerned, Anil K Sood, co-founder of the Institute for Advanced Studies in Complex Choices, finds GVA to be the more appropriat­e indicator of economic performanc­e.

“Once the statistica­l discrepanc­ies are sorted out and the wholesale price index stabilises, we will get reliable numbers for real GDP. Till then, I would prefer to use GVA as a measure to assess our performanc­e,” he says.

Sood points out that the GDP numbers have statistica­l discrepanc­ies, whose level has changed substantia­lly between the first and second Advance Estimates. Also, the GDP deflator has been showing inconsiste­nt levels, he says. “It is far lower than expected, given that retail inflation continues to be high,” Sood explains.

GDP deflator is the implicit price deflator, taken to be the ratio of the value of goods and services produced in a year at current prices to that of the prices during the base year. It is nothing but a kind of inflation in the GDP terminolog­y. However, most of it represents wholesale price inflation and just around one-third of it is consumer price inflation.

Bank of Baroda’s chief economist, Madan Sabnavis, says GVA is better than GDP, as it tells us how various sectors are performing. “The basic strength comes from the output produced and hence GVA is the better indicator of the state of the economy,” he explains.

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