“Base Year Change And Its Impact On Future Economy Of Country”

Base Year ChangeFirst estimate of National Income was made by Dadabhai Naoroji in his book Poverty and Un-British Rule in India while the first scientific estimate was made by Dr.V.K.R.V Rao for financial year 1931-32.

In Independent India first National Income Estimate was published in 1956 with 1949 as base year. Since then there has been seven base year changes and the new base year is 2011-12. The change in base year is required essentially because data being used for the estimation becomes outdated with passage of time. With changing time economy too changes leading towards new basket of goods and services as well as increase / decrease in variation in weight assigned to the existing categories of goods and services depending upon the change in its consumption pattern. Hence base year 2005 did not included importantly products and services based upon new technologies like smart phones, LED TV’s at the same time products like old generation TV’s etc were included in it whose sale and production is negligible in today’s time thus causing underestimation of the real strength of the economy.

The base year change and selection was decided based upon Census 2011 reports, National Sample Survey Organisation’s employment-unemployment and Consumer Expenditure Survey 2011-2012, Debt and Investment Survey 2013, Annual Survey of Industries 2012-2013 and all India Livestock Census 2012. Epso facto base year change is regular practice among developing economies considering the fast changing structure of world economy as well as need of updated National Accounts based upon latest set of information.

The eloquence of this year’s base year change was in the fact that this time it was followed by change in method of GDP calculation which is internationally accepted. GDP is the money value of all the finished goods and services produced in the domestic territory of a country in a year time. Domestic territory includes political boundaries, territorial water (including ships), embassies as well as consulate offices.

It should be noted that base year changes are different from annual revisions in National Accounts because in annual revisions, changes are made only on the basis updated data while there is no change in framework for calculation nor any new data source is used. On the other hand in case of base year revision, apart from change in referene year of calculation conceptual changes as recommended by the international guidelines are GDPincorporated too. Hence the current base year change is one of the largest exercises of base year revision for GDP ever undertaken in India and is surely breakthrough in framework from the previous series.

Before the current base year change GDP growth was estimated at factor cost, which excluded indirect taxes but included subsidies. Factor cost here means factor inputs namely Land, Labour, Capital and Entrepreneurship while the non factor input costs are raw material and transportation.

Thus, the old formulae was

GDP(Factor Cost)=GDP(M.P)-Indirect Taxes+ Subsidy

Here Indirect Taxes included Excise, VAT, MODVAT Sales Taxes etc.

In the new definition of economic growth, in place of GDP at factor cost, GVA(Gross Value Added) at base price is used.

GDP(M.P)=GVA(B.P)+Indirect Taxes-Subsidy

The difference between the GVA at base price and GDP at factor cost is that production taxes (taxes which are imposed even if products are not produced eg: Property) will be included.

Change in base year implies two things, first is the change in price and quantity base for individual price and quantity relatives and secondly the change in weights used in aggregate individual quantity to sub-indices and to aggregate then into more indices.

Now the effect of base year change followed by changed calculation method resulted into increased size of economy. For the year 2013-14 through new method the GDP at market price escalated to 99,21,106 crore* which through old method was 61,95,845 crore* while the GDP growth rate for the year 2013-14 jumped from 5 percent to 6.9 percent.  The size of Indian economy jumped to Rs 111.7 lakh crore in 2013-14 from the earlier estimate of Rs 105.4 lakh crore. Increased size of economy eventually caused decrease in the fiscal deficit as well as current account deficit, which is according to fiscal consolidation targeting done by government according to which fiscal deficit had to be 3 per cent of the GDP by 2016-17.Moreover the whole new process of GDP calculation led to variation in sector wise contribution of Agriculture, Manufacturing and Service Sector in the overall GDP. Contribution of Manufacturing sector increased from 12.9 percent to 18 percent while that of agriculture sector went below as compared to earlier figures.

Nominal GVA increased by 13.2% during 2013-14 as compared to last year mainly because of higher growth in ‘trade & repair services’ (14.3%), ‘communication and services related to broadcasting’ (13.4%), ‘other services’ (10.7%),‘public administration & defence’ (4.9%),  ‘agriculture, forestry and fishing’ (3.7%),  and ‘construction’ (2.5%) sectors.other Key indicators that got affected were Net National Income,Gross National Disposable Income,Gross Savings as well as Consumption Expenditure.

The changes brought into the method of calculation is much needed step forward by India towards adapting more universally accepted methodology for National Income Account Analysis as prescribed by International Monetary Fund. This is among one of the various initiatives by the present government to showcase as one of the best possible investment destination in world. Truth be told in 2002 Ministry of Corporate Affairs was faced with problem of providing service to nearly 7.5 lakh corporate entities,and the fluency of services provided was hampered because of exorbitant amount of paperwork involved and various restrictions. Similarly back then there was no concept of single window clearance for new entities or the concept of Single Person Company in India hurting India’s investment prospect. Currently new initiatives implemented  like MCA21 Mission mode project which pledges to provide online access of all the government services to business prospects with reduced execution time, similarly concept of Financial SEZ’s, separate Public Debt Management Agency are among various steps towards improving countries stature among leading global investment hubs in the world.

Contributed by Sharique Hassan Manazir (Class of 2011-13, IBS HYDERABAD )

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