How is “GDP” calculated?
Gross Domestic Produce or GDP is one of the most important metric for any country which takes into account every good and service produced in the country. Let's see how this magic number is calculated
Today we had honorable RBI Governor, Shri Shaktikanta Das speaking in a live conference that GDP of India for FY22 is expected to remain at 9.5%. It was much lower than earlier projections of 18.5%, but still amidst the gloomy pandemic-hit year, he sprinkled some positive affairs like expectations of normal monsoon, industries adapting to new ways of working and increased demand from urban regions. So, this brings us to one important question – How is this one number of GDP calculated which takes into account every small thing that happens in our country like crops grown, vehicles manufactured, school fees of students etc.? So, let’s try to demystify what’s this gaga about the GDP and how the gigantic task of calculating it is carried out.
Gross Domestic Product also knows as GDP is calculated by the experts of National Statistical Organisation(NSO) after taking data inputs from all the state departments, zilla parishads, village panchayats and even the post offices. The NSO collates and groups all the data into 7 segments – Agriculture & Allied, Mining and Quarrying, Manufacturing, Electricity & Utilities, Trade & Transportation, Finance & Real Estate and Public Administration (Govt. Spending). Now for agriculture and allied activities, it’s a straightforward data collection from zilla parishads on crops and livestock transactions done, however, for manufacturing there comes a new term for calculation which is GVA – Gross Value Added at each stage of production. So, the method applied by NSO in GDP calculation for manufacturing is GVA at base prices along with product taxes and reducing product subsidies. Quite a hefty task.
Next, let us see how the value being added by services unit like transport, trade, tourism etc. is calculated. For a trading activity, its output in crude terms is calculated by taking total sales and reducing the costs of goods purchased. Since, every year this value might change, hence the NSO benchmarks every year’s trade output from last year’s data. This trade can be bucketed as per various industries like for banking, it’s the net interest earned which gets added, for insurance it’s the new premium which gives the additional value and so on for others.
Now comes the most tedious group of value generation which is public administration. It’s like how would you calculate the revenue generation by defense or a revenue generated by a municipal school? Sounds challenging, right? So, a different approach is adopted for the same clubbed under the category of non-market output which is addition of employee compensation (like salaries paid to army personnel, teachers etc.), along with whatever they consume like arms, chalks, blackboards, rents, power etc. So combining all the output of three major units of agriculture, manufacturing and government spending is how the NSO arrives at the GDP.
Apart from the aforementioned methods of data collection, there are some other sources of data too which NSO applies to arrive at the magical number of GDP. For public administration spending, it’s the Government Ministries which provide the data; For industries it’s the Ministry of Corporate Affairs and for smaller and un-incorporated factories it’s an annual survey of Association of Smaller Industries which provides all the data. Lastly, for the unorganized sector like your cobblers, tailors, small shops, etc. one cannot find the data easily. For that, it’s the NSSO survey which is conducted every 5 years which throws light on this informal sector (5 years because it’s a mammoth task in imagination only forget about implementing it on a population of more than 1.3 billion people).
Now after reading through all these points and calculations, one may have a question that if it’s such a set process then why do every now and then we get to hear that GDP numbers are revised from earlier projections. This is because our economy is majorly informal. To be precise 83% of our workforce is employed in informal sector and as mentioned earlier it’s a humungous task to capture data from all of those. So, for first cut projections, NSO generally takes the growth data of formal sector and projects that the same growth would have happened in the informal sector only, but that isn’t always true. Think about Demonetization as an event – do you think the growth of formal or informal sector would have been same? Not at all and hence later revisions for arriving at actual numbers.
One last point and one of the most important is choice of base year. GDP is always calculated in percentage so a logical question, how is this base year chosen? Actually, base year changes every 10 years. Earlier it was 1994-95 as base year, then it was 2004-05 as base year, then 2012-13 and so on. The base year changes because the patterns of consumption change with time. For eg. 20 years earlier there was no mobile or internet bills, entertainment in form of movies or Doordarshan was very cheap. 10 years later there was a mobile bill added, Doordarshan became cable TV and movie hall became expensive luxury theatres. Today there might be less of telecom voice bill but more of internet bill, no movie theatre but 3-4 OTT subscription and so on. Hence, the consumption basket changes all together so the need of a different base year. Nevertheless, we at Finns&Marks would never let our quality of content consumption change, so don’t forget to subscribe if you haven’t till now!
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