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India may switch to chain base mechanism for GDP estimates

The govt is considering moving to the chain base method of calculating the gross domestic product.

, ET Bureau|
Updated: Dec 12, 2019, 08.17 AM IST
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The shift would require much better data collection with quick addition of new businesses, goods and establishments.
NEW DELHI: In a radical change, the government is considering moving to the chain base method of calculating gross domestic product, from the current practice of a fixed base year to better reflect changes in the economy and prevent controversies.

The ministry of statistics and programme implementation is exploring the idea of a chain base index, where national account statistics or GDP estimates are compared with those of the previous period, instead of a fixed base revised every five years.

The chain base method will capture structural changes in the economy faster by allowing new activity and items to be added every year. Current GDP estimates are based on data for 2011-12 and are due for an update.

“This is the international practice – first reduce your timeline from a 10-year revision to a five-year revision, which we shifted to but the ideal is every year. This improves the indicator,” said an official aware of the development.

“The advantage is that new items and factories which are producing can be introduced. In a five-year revision, it takes 7-8 years to get reflected.”

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While discussions on changes are on, no time-frame has been set for a shift. The statistics office junked the idea of shifting to 2017-18 as base year as it was not considered a normal year.

The government faced flak when the GDP Series was revised to 2011-12 from 2004-05 and released in 2015 and attracted criticism after GDP growth for FY17, the year of demonetisation, was revised to 8.2% from 7.1%. Besides the new base year, the methodology was changed to capture information on the corporate sector from the ministry of corporate affairs MCA-21database.

CHAIN-WEIGHTED FROM FIXED BASE
The US shifted to the chain base or chain-weighted index in 1996 and other developed countries followed. In most cases, the shift resulted in significant changes in the numbers of the preceding year, indicating the better outcome produced by this method.

In a fixed base index, weight assigned to various economic activities and goods stays unchanged even if the economy changes structurally. Besides, this method does not factor in relative changes in prices and impact on demand.

In a chain-weighted index, changes are incorporated annually to adjust changes quickly. For instance, it can be argued that current GDP statistics do not fully capture India’s gig economy.

“With 60% of India’s GDP coming from services, a chain based index will capture the changes faster and reflect the realities better than a fixed base. Most developed countries, including the US and those in Europe, follow this practice,” said a former member of the National Statistical Commission.

Such an index will make it easier to compare India’s growth with other countries, said Abheek Barua, chief economist at HDFC Bank. “Consequently, taking decisions on investments and fund flows, where differentials are concerned, would become rigorous,” Barua said.

“This should be done soon but the problem is of inter-temporal comparability because we have never used chain-based index before,” said former chief statistician Pronab Sen.

CHALLENGES
The shift would require much better data collection with quick addition of new businesses, goods and establishments. This would impose a burden on the data collection machinery as well as the respondents. “If you want frequency, you have to reduce the respondent burden and may have to compromise on the details,” the official said.

NOMINAL CONCERN
As per Sen, while the moving index will show growth closer to the nominal number, its difference from real growth would depend on weights assigned to elements.

“The problem is that the government does not have volume data for the previous year. However, this can be overcome by using weights that are a year older. Chaining means fixed frequency. So, they can fix weights,” Sen said.

“It needs to be seen if growth rates in the chain-based index are closer to nominal or real because it is not necessary if it creates a differential,” said NR Bhanumurthy, professor, National Institute of Public Finance and Policy.

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