20 April 2024 : Daily Answer Writing

Q1) Assess the present computational methodology for Gross Domestic Product (GDP) in measuring economic activity in India. Do you think GDP is a good measure of development of a country?

 (250 Words/15 Marks)

Gross Domestic Product (GDP) is the final value of goods and services produced within the domestic territory of an economy in a particular financial year. Central Statistical Office (CSO), in 2015, changed its methodology to calculate GDP as recommended by the United Nations System of National Accounts in which –

1. Sector-wise estimates of Gross Value Added (GVA) were taken into account.
2. GDP figures were now calculated based on Market Price and not Factor Cost.
3. Base year change from 2004-05 to 2011-12.
4. A new series of data from MCA-21 was introduced, which includes the data of all the companies registered with the ministry of corporate affairs.

 

The various advantages of adopting new computation methodology for calculation of GDP are-

1. Change of base year provides comprehensive covering of financial institutions and regulatory bodies’ like- SEBI, PFRDA, and IRDA along with representation of local organizations and institutions.
2. Data for corporate income is taken which allows the collection of granular information even from the level of the small firms.
3. GVA provides a better picture of GDP as it provides sector-wise breakdown which helps policymakers to formulate sector-specific policies.
4. Widened the scope by calculating value addition in the agricultural and manufacturing sector by using GVA.
5. The new method is more robust as it estimates more indicators such as consumption, employment, and the performance of enterprises.
6. More globally aligned with the United Nations guidelines in System of National Accounts-2008 and also highlights the underestimation of industrial growth coverage when compared with 2004-2005 GDP data.

 

Some of the issues pertaining to the new methodology are:

1. Unreliable MCA21 data, as NSSO report highlights that 36% of active companies in the MCA database were untraceable and added needless growth.
2. Inaccurate estimation of the strength of the unorganized sector as new methodology uses data from the organized sector as a proxy for the unorganized sector.
3. As per some experts, the new method is too complex and may present an overestimation of growth data.

 

The limitations of using GDP as a measure of development of a country can been seen as follows:

1. GDP is only a measure of growth and not social progress and fails to capture the distribution of growth in different sections and regions of the country.
2. GDP fails to cover the various transactions in the rural economy in the form of a barter economy and fails to cover the large chunks of informal economy.
3. Care economy that is a domestic work and the housekeeping are also not included in GDP estimates.
4. It does not capture the various data like the environmental costs and real poverty estimates as the standards of living, health and education are not properly estimated.

Eg: India’s lower ranking in various index like Global Hunger Index, World Happiness Report etc.

5. GDP gives an overbearing focus to the production of goods and services, and fails to factor in/quantify consumer experience, sometimes compromising the quality.

 

There is a need to fulfill the inadequacies of GDP by using other metrices like Green GDP, Human Development Index, NITI Aayog’s Multi-dimensional Poverty Index and SDG Index India etc. Such new indices and concepts will give a more complete picture of the level of well-being and sustainability of natural resources and aid to the already existing GDP calculation.