Answer:

GDP is the total value of goods and services produced within the country during a year. The calculation so far was based on factor or basic cost, the new method:

♤ Takes into account market prices paid by consumers.

♤ Introduces the concept of Gross Value Added (GVA) at the aggregate and various sectoral levels.

♤ Changes base year 2004-05 to 2011-12.

According to the arguments put forward these changes would have the following benefits:

♤ It is in line with international practice which involves calculation at market costs.

♤ The move is expected to better capture the changing structure of the Indian economy. e.g. New GDP series will be based on data from MCA21, bringing in more companies from the unlisted and informal sectors as compared to the Annual Survey of Industries used till now.

♤ The base year change ensures that the products and services included in the GDP calculation do remain contemporary and reflect the present state of the economy

e.g. the latest change in base year has included the recycling industry which didn’t

figure in the earlier GDP computations.

♤ Global investors use growth prospect numbers to allocate their investment allocations between countries - GDP is a key metric here. So news that India’s GDP growth has averaged 6 per cent for the last three years and not 4.6 per cent as thought earlier, may help investors view India in a more favourable light.

The revised methodology, however, poses several concerns as well:

♤ The revision has bumped up India’s growth numbers sharply and put them at odds with other leading indicators of industrial activity, such as the Index of Industrial Production (IIP), which still shows weakness.

♤ While the new GDP shows 5.3 per cent growth in manufacturing in 2013-14, the actual performance of NSE-listed companies in the manufacturing space shows that earnings have been declining in the last two years (by 4 per cent in 2013-14).

Overall the changes put the Indian economy in a better light than was thought previously. The concerns on the other hand relate to the disparity in other figures that do not corroborate the positive story brought about by new changes. The need is to disseminate information in a better way and bring the major indicators in tune with each other.