Gross domestic product (GDP) is the single standard indicator used across the globe to indicate the health of an economy. Policy makers, investors, economists, businesses, bankers, politicians, and even the media keep a close watch on GDP estimates. GDP provides one single number that represents the monetary value of all the finished goods and services produced within a country's borders in a specific period. GDP may be easy to define but it is complex to calculate, and countries across the globe have different methods to arrive at their country's GDP. This article discusses how India calculates its GDP.
The Data Collection Process
The Central Statistics Office (CSO), under the Ministry of Statistics and Program Implementation, is responsible for macroeconomic data gathering and statistical record keeping. Its processes involve conducting an annual survey of industries and compilation of various indexes like the Index of Industrial Production (IIP), Consumer Price Index (CPI), etc.
The CSO coordinates with various federal and state government agencies and departments to collect and compile the data required to calculate the GDP and other statistics. For example, data points specific to manufacturing, crop yields, or commodities, which are used for the Wholesale Price Index (WPI) and CPI calculations, are gathered and calibrated by the Price Monitoring Cell in the Department of Consumer Affairs under the Ministry of Consumer Affairs. Similarly, production-related data used for calculating IIP is sourced from the Industrial Statistics Unit of the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry.
All the required data points are collected and aggregated at the CSO and used to arrive at GDP numbers.
The GDP Calculation Process
The GDP in India is calculated using two different methods, leading to differing figures that are nonetheless close in range.
The first method is based on economic activity (at factor cost), and the second is based on expenditure (at market prices). Further calculations are made to arrive at nominal GDP (using current market price) and real GDP (inflation-adjusted). Among the four released numbers, the GDP at factor cost is the most commonly followed figure and reported in the media. A sample GDP report that indicates the GDP calculation for all four figures can be accessed here. (See related: Nominal vs. Real GDP, and the GDP Deflator.)
The factor cost figure is calculated by collecting data for the net change in value for each sector during a particular time period. The following eight industry sectors are considered in this cost:
- Agriculture, forestry, and fishing
- Mining and quarrying
- Electricity, gas and water supply
- Trade, hotels, transport, and communication
- Financing, insurance, real estate, and business services
- Community, social and personal services
Here is an edited sample report from Q2 2014 showing overall GDP change of 6.9%, with a similar percentage change across different industry sectors. For example, mining and quarrying declined by 2.9%, while financing, insurance, real estate, and business services saw a rise of 10.5%.
Using these numbers, it is easy to see the current state of the economy and its different subsectors. Investors can make informed business and investment decisions and the government can implement policies accordingly.
The expenditure (at market prices) method involves summing the domestic expenditure on final goods and services across various streams during a particular time period. It includes consideration of expenses towards household consumption, net investments (i.e., capital formation), government costs, and net trade (exports minus imports).
The GDP numbers from the two methods may not match precisely, but they are close. The expenditure approach offers a good insight into which parts contribute most to the Indian economy. For example, domestic household consumption, which forms 59.5% of the economy, is the reason why India remains unaffected to a good extent by global slowdowns. Any economy with a high concentration on exports will be more susceptible to the effects of global recessions.
Each quarter’s data are released with a lag of two months from the last working day of the quarter. Annual GDP data are released on May 31, with a lag of two months. (The financial year in India follows an April to March schedule.) The first figures released are quarterly estimates. As more and more accurate datasets become available, the calculated figures are revised to final numbers.
The Bottom Line
India calculates GDP in two different ways. Both methods have advantages for the end user depending upon his/her needs. To assess the performance of different industry sectors, the factor cost GDP details are useful. While expenditure-based GDP calculations indicate how different areas of the economy are performing – whether trade is improving, or whether investments are on the decline.